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Full text of "The financial history of the United States, from 1774 to [1885]"

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THE 



FINANCIAL HISTORY 



UNITED STATES, 



FEOM 1861 TO 1885. 



BY 



ALBEET S. BOLLES, 



PBOFESSOB OF MEECAXTILE LAW ANB PBACTICE IN THH WHABTON SCHOOL OP 

FINANCE AND ECONOMY, UNIVERSITY OF PENNSYLVANIA; AND 

EDITOR OF " THE BANKERS* MAGAZINE." 



NEW YORK: 
D. APPLETON AND COMPANY, 

1, 3, AND 5 Bond Street. 
1886. 




l^f^lHO 



ComuQHT, 1886, 

By ALBEET S. BOLLES. 



GRANT & FAIEES, 
PHILADELPHIA. 



By the Same Author. 



The Financial History of the United States 
from 1774 to 1789. Second Edition. $2.50. 

The Financial History of the United States 
from 1789 to 1860. Second Edition. $3.50. 



Practical Banking. Third Edition. $3.00. 

The Industrial History of the United States. 
Third Edition. $3.75. 

The Conflict between Labor and Capital. 
$1.50. 



TO HIS FRIEND, 

GEORGE D. BAKER, 

PRESIDENT OP THE FIKST NATIONAL BANK OP NEW YORK, 

2[t)is toolumc is dlebicateiJ 



THE AUTHOK. 



PEEFAOE. 



The three volumes now published cover the period of our finan- 
cial history from 1774 to 1885. A f^iipplementary volume, however, 
containing the more important statistics of the subject, is needful, 
and will be completed, it is hoped, within a year. 

AMien the first volume of the work was published, one critic 
remarked that a single volume was quite sufficient to cover the 
ground now gone over in the three. On the publication of the 
second volume, he remarked that several matters of much im- 
portance which had happened during the period covered bj' it had 
been omitted. The inconsistency between the criticisms is apparent. 
The truth of the latter remark is readily acknowledged; but the 
omissions were designed, as they belong more properly to another 
work closely related to this, and which we hope to complete at no 
distant day. 

In working up the facts lying within a field so expanded, an 
author may select those which are most agreeable to himself, or 
which will most interest his readers, or which he may regard as tlie 
most important in solving future questions. We have not woi-ked 
in either of these lines ; but have endeavored to include every topic, 
measuring its importance by other matters at the time of its 
occurrence. In other words, we have tried to preserve a unity 
of proportion in the treatment of topics, though, of course, per- 
fection in this regard was not possible. 

Very likely others will differ in the estimate thus formed of the 
importance of many of the events described in this volume. Some 
will doubtless maintain that more space ought to have been given 
to the first great war loan, or to the issue of legal-tender notes, or to 
the internal revenue or national banking systems, or to the frauds 
in administering the government, or that a fuller personal account 
of the principal administrators of the national finances was desirable, 
or an extended critical consideration of the financial policy of the 
government in all matters. We realize fully that several of the 
chapters are each worthy of a volume, and in completing the 

vii 



viii PREFACE. 

original plan, two of the topics treated in this and in the preceding 
volume will be treated with much greater fullness. 

When the second volume was published one critic remarked the 
author was " only an annalist." The charge can be as truthfully 
made of this volume as of the other. Though such a method may 
show that he " does not seem to be sufficiently equipped as an 
economist," he has attempted to do nothing more than to assemble 
the facts of our financial history in an orderly manner, uncolored 
by economic theories. No attempt has been made to play the part 
of the dogmatist or the schoolmaster, or to make the crooked paths 
straight. If the author possesses economic opinions, he has had 
no desire to give them an airing in this volume, contenting himself 
with giving the facts lying within the proper field of inquiry, 
whatever they may be. Whether the facts are consistent is no 
concern of his ; whether they sustain or undermine any economic 
or other principle that he may hold, is also, he believes, of small 
consequence to the pubhc. The important thing is to state the 
facts fairly, and, as far as possible, their surroundings; and if, in 
attempting to do this, he has erred, correction shall be made as 
speedily as possible. 

It may also be stated that the additions of figures in the tables 
include the cents which have been omitted. This statement is 
made here to avoid repetitions wherever the tables occur. 

It is no small pleasure to make a grateful acknowledgment to 
several gentlemen for many of the books used in preparing this 
volume, especially to Mr. Eobbins Little, Superintendent of the 
Astor Library, ]\Iessrs. Lloyd P. Smith, Librarian, and George 31. 
Abbott, Assistant-librarian of the Philadelphia Library, and jMr. 
Stone, Librarian of the Pennsylvania Historical Society. A large 
indebtedness is also due to Mr. Cannon, United-States Comptroller 
of the Currency, j\Ir. Whelpley, United-States Assistant-treasurer, 
and \\\ B. Greene, for famishing figures and verifying statements. 



CONTENTS. 

BOOK FIRST. 
FB03I MARCH, 1861, TO SEPTEMBER, 1865. 

PAGE 

CHAPTEE I. 

ADjaXNlSTEATION OF THE TREASURY, MAECH TO JulT, 1861 . . 3 

CHAPTEE II. 
Financial Legislation of Congeess, July, 1861 11 

CHAPTEE in. 
The One Hundeed and Fifty Million Bank Loan 20 

CHAPTEE IV. 
The Issue of Legal-Tendee Notes 43 

CHAPTEE V. 
Moee Legal-Tendee Notes 74 

CHAPTEE VI. 
Peemanent and Tempoeaey Loans, Januaey, 1862— July, 1864 87 

CHAPTEE VII. 

Administeation of the Treasuey, July, 1864 — September, 1865 115 

CHAPTEE VIII. 
Effect of Issuing Legal-Tendee Notes and Suspending Spe- 
cie Payments 130 

ix 



X CONTENTS. 

PAGE 

CHAPTEK IX. 

Taxation and Growth op the Public Debt, July 1, 1861 — 
June 30, 1862 159 

CHAPTEE X. 

Taxation and Gbowth op the Debt, July, 1862 — Septembeb, 
1865 179 

CHAPTEE XI. 
The National Banking System ' 197 

CHAPTEE XII. 
Appropbiations and Expendituees, 1861-1865 227 

CHAPTEE XIII. 
The Cost of the Wab 241 



BOOK SECOND. 

FROM SEPTEMBEB, 1865, TO MARCH, 1885. 

CHAPTEE I. 
Constitutionality op the Legal-Tender Law 251 

CHAPTEE II. 
Eesumption op Specie Payments 263 

CHAPTEE III. 
Payment and Eepunding op the Public Debt 305 

CHAPTEE IV. 
The National Banking System 341 



CONTENTS. XI 

PAGE 

CHAPTER V. 
ComAGE 373 



CHAPTER VI. 
Internal Reventie 398 

CHAPTER VII. 
Taxation of Imports 446 

CHAPTER Vni. 
Collection of the Customs Re-^t^kue 489 

CHAPTER IX. 
Government Accounting 523 

CHAPTER X. 
Appeopeiations and Expenditures, 1865-1885 536 



BOOK I. 

FROM MARCH, 1861, TO SEPTEMBER, ]865. 



FINANCIAL HISTORY 



THE UNITED STATES. 



CHAPTEE I. 

ADMINISTRATION OF THE TEEASUEY. 
MARCH TO JULY, 1861. 

Aptee a long era of peace the nation engaged in civil war. 
Dimly foreseen a long time in the growing ambition of many 
opposed to the Union, the war burst at last on the country 
with the suddenness of a volcano or a meteor's glare. The 
effects of the struggle, passing beyond our country, swept over 
the entire earth. In the first part of our work we shall turn 
the light of history on the financial side of this awful contest. 

On the 4th of March Mr. Lincoln was inaugurated Presi- 
dent. For secretary of the treasury he nominated Salmon 
P. Chase, of Ohio, and the nomination was unanimously 
confirmed. Horace Greeley had strongly urged the selection 
of Mr. Chase, because he " would command, in the highest 
degree, the public confidence." Mr. Chase declined the offer 
of the position when first tendered to him. He urged that 
he was not fitted for it, either by education or habits ; he 
had just been chosen senator for a full term, and he believed 

3 



4 FINANCIAL HISTOEY OF THE UNITED STATES. [1861. 

that his appropriate sphere was in the Senate.* Had his 
judgment not been swayed by the advice of his friends he 
probably would have remained firm in declining the offer. 
In the letter containing the resignation of his seat in the 
Senate to the governor of Ohio, he wrote, "It would be 
far more consonant with my wishes to remain at the post to 
which the people of Ohio, through the General Assembly, saw 
fit to call me. But the President has thought fit to call me 
to another sphere of duty, more laborious, more arduous, and 
fuller, far, of perplexing responsibilities. I sought to avoid 
it, and would now gladly decline it, if I might. I find it 
impossible to do so, however, without seeming to shrink from 
cares and labors for the common good, which cannot be 
honorably shunned."^ Without any financial experience 
whatever, he dared "take charge of the finances of the 
country under circumstances most unpropitious and forbid- 
ding." Perhaps, if he had had a clearer conception of the 
duties of the office, he would have been less bold in accepting 
it. He was then fifty-two years of age. 

The credit of the government had been undermined by the 
preceding administration. The revenues had withered away 
without concern, the public indebtedness had been increased, 
and money could be borrowed only at very high rates. AYheu 
Congress met in December, " the treasury was empty — bank- 
rupt. There was no money to pay the public creditors, who 
were then pressing for payment. There Mas not money 
enough even to pay members of Congress." In the middle 
of January, General Dix, who had been appointed secretary 

' Letter of F. A. Conkling, who accompanied Mr. Greeley, to E. G. 
Spaulding. Spaulding's Financial History of the Wai-, p. 83. 
' Schuckers's Life of Chase, p. 207. 



1861.] ADMINISTRATION OF THE TREASURY. 5 

of the treasury, wrote to the chairman of the Committee of 
Ways and Means, "Within the last few days the amount 
of overdue treasury-notes presented for redemption has ex- 
ceeded the power of the treasurer to place drafts in payment 
on the assistant treasurer at New York, where the holders 
desired the remittances to be made, and an accumulation of 
warrants to the amount of about $350,000 has occurred, on 
this account, in the treasurer's hands, which he has been 
unable to pay." ' 

The secretary of the treasury had authority to issue ten 
millions of treasury-notes at par, to creditors or others, 
at the rates of interest offered by the lowest bidder after 
public advertisement of not less than ten days. On the 18th 
of December he invited proposals for $5,000,000 of these 
notes. Offers at twelve per cent, or less, were made for 
$1,831,000. The remaining offers were for $465,000, at 
rates ranging from fifteen to thirty-six per cent. He did 
succeed in raising the small sum of $5,000,000 at twelve per 
cent interest." When Secretary Chase entered the treasury 
department he must have speedily learned two things, the 
imperative need of borrowing money, and the great diiSculty 
in obtaining it, even at high rates of interest. 

1 Letter on Condition of the Treasury, Jan. 18, 1861. Mis. Doc., No. 20, 
36 Cong., second session. 

' When the loan was advertised Harper's Weekly remarked : " The money 
is required to pay soldiers, sailors and others whose claims on the govern- 
ment have accumulated to this large amount, and have been left unpaid for 
some time. It is not supposed that the negotiation will be an advantageous 
one for the government. It was proposed to obtain for the bonds the en- 
dorsement of the States of New York, Pennsylvania, Ohio, and Massachu- 
setts ; and, thus fortified, it is supposed that they might have commanded 
par." This proposal, however, was defeated. Feb. 23, 1861. 



6 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

Most of the revenue was derived from duties on imports. 
But this stream had fallen low. Secretary Dix informed 
the chairman of the Committee of Ways and Means that 
$16,000,000 "would be a liberal estimate for the revenue 
from customs," for the first half of 1861. A new tariff law 
was enacted on the 2d of March,' but a richer yield of revenue 
from it could not be expected for a considerable period. 

When Secretary Chase assumed office, authority existed for 
negotiating loans by the Acts of June 22d, 1860, and Feb- 
ruary 8th and March 2d, 1861. The first Act authorized a 
loan of $21,000,000 at six per cent; but Secretary Cobb had 
borrowed $7,022,000 by this authority. By the February Act 
he could borrow $16,994,000 at six per cent^ and bids for 
both loans above or below par might be accepted. The entire 
amount of the February loan was $25,000,000, but the re- 
mainder had been negotiated. The authority to make the 
ten million loan of March 2d, 1861, was embedded in the 
tariff law of that date. The interest could not exceed six 
per cent, and the law further provided that treasury-notes 
bearing not more than six per cent interest might be sub- 
stituted " for the whole or any part of the loans for which " 
the President was "now by law authorized to contract and 
issue bonds," including the loan last mentioned. 

On the 22d of March Mr. Chase advertised proposals for a 
loan of $8,000,000. Ten days were given for receiving offers. 
Five days afterward James Gallatin, president of the Gallatin 
Bank of New York, wrote^ to him that the loan had "already 
been taken from the market within about one million of 

'36 Cong., second session, chap. 68. TJiis law went into operation on 
the 1st of April. 

2 March 27, 1861. 



18610 ADMINISTRATION OF THE TEBASUHY. 7 

dollars, having been absorbed by the banks for currency, or 
by the savings banks and individuals or institutions through- 
out the country as a permanent investment ; so rapidly," he 
continues, "has this absorption gone on, that therg is some 
probability of the million yet in market being withdrawn in 
the same manner before the day which you have appointed 
for the taking of the new loan ; and there is reason to hope 
that, in the present state of the money market, and the grow- 
ing confidence of the people in the upright intentions of the 
administration, you will realize within five or six per cent of 
par for the new, notwithstanding the terrible shock which 
public credit received toward the close of the late administra- 
tion." Mr. Gallatin then adds, " Supposing it practicable to 
negotiate the loan at that price, the question arises whether to 
do so, or to adopt the alternative of an issue of treasury-notes 
at par." 

At the very beginning, therefore, of his administration of 
the treasury office, Mr. Chase was confronted with a grave 
question with respect to modes of getting money. Should he 
issue long-time bonds for it, or six-per-cent treasury-notes of 
small denominations? He could procure the money needed 
by the latter mode at rather better rates than by the former, 
and this consideration weighed strongly with him. The 
opinions of those who pondered the subject the most care- 
fully were divided. The newspaper press also expressed a 
divided opinion. 

Mr. Gallatin was opposed to the issue of treasury-notes. 
His reasons are worth giving : " In the form of stock," he 
writes to the secretary, " this loan will be funded and out of 
the way for twenty years ; but, in the case of treasury-notes, 
should sudden panics arise in the uncertain future, these 



8 FINANCIAL HISTOEY OF THE UNITED STATES. [1861. 

would be thrown in upon you for duties, and most likely at a 
moment when you would be heavily pressed for means to 
carry on the government, they would aggravate the embar- 
rassments, of the treasury. Besides, future emergencies may 
arise, in which the issue of treasury-notes would be the 
best and speediest means of supplying temporary wants. It 
would seem, therefore, more desirable to negotiate this loan as 
you have proposed, in the form of stock having twenty years 
to run, if you can do so, which I have no doubt you can, at a 
fair price — say three to four per cent above the rate obtained 
by the late administration for the last loan — and reserve the 
power of issuing treasury-notes for future contingencies." 

The total amount of bids for the eight million loan was 
$27,182,000, and ranging from eighty-five to one hundred 
per cent. Many of the bids were at the rate of ninety-two 
and ninety-three per cent, or fractions of those figures. The 
secretary accepted bids for $3,099,000, and the balance of the 
loan, $4,901,000, consisted of treasury-notes, sold at par or 
above. Thus the loan was almost equally between bonds and 
treasury-notes.^ 

This action of the secretary has been regarded by many as 
proof that he was a believer in fiat money from the very out- 
set of his administration. Those who think so perhaps do 
not understand the nature of the notes issued at that time. 
They were made payable to the order of the persons who re- 
ceived them, and bore interest at six per cent, payable semi- 
annually, were convertible into bonds and receivable in pay- 
ment of all public dues. Though circulating as a substitute 
for money, they were not a legal tender among individuals, 
and circulated by voluntary action. They were therefore very 
> Treasury Eeport, July 4, 1861. 



1861.] ADMINISTRATION OF THE TREASURY. 9 

different in their nature and origin from legal-tender notes. 
They -n-ere, in no sense, a forced currency. Mr. Gallatin was 
far-seeing when he suggested to the secretary that this re- 
source for getting a monetary supply might be prudently 
reserved for the most pressing occasions; but Mr. Chase's 
decision does not involve the principle of fiat money. Public 
opinion was divided on the question of issuing treasury- 
notes, and Mr. Chase sought to satisfy it by issuing bonds for 
a part of the loan and these notes for the balance. 

On the 11th of May the secretary advertised proposals 
for the balance of the February loan, amounting to $8,994,- 
000.^ The war had been began by the attack on Fort Sum- 
ter nearly a month before, and this event for a short time 
unfavorably affected the public credit. The readiness to give 
life in defence of the Union was not met with an equal readi- 
ness by the wealthy in lending money for the same purpose. 
The amount of bonds sold was $7,310,000, at rates which 
ranged from eighty-five to ninety-three per c«nt, and the re- 
mainder of the loan, $1,684,000, was taken in treasury-notes 
at par. The proportion of treasury-notes to the amount of 

' When this loan was offered the New York Times remarked : "Our 
opinion has been and is that the $9,000,000 could be employed in payments 
to the public creditors in convertible treasury- bills, as during the Mexican 
war, without entailing loss by way of discount on the government ; but 
deference is due to the wishes of the bankers of New York, who have on 
several recent occasions furnished, and again from the same public and 
patriotic motives propose t« furnish the money in gold, and if the advice of 
their committee to the secretary, in favor of a funded stock to this amount, 
leaving the market price free to take $14,000,000 in treasury paper at par 
later in the present war, is acted upon, we doubt not it will be on terms 
wiiich will be justified by sound reasons of State, and not especially onerous 
upon or discreditable to the government." May 13, 1861. 



10 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

the loan was much smaller than the proportion of them to the 
amount of the prior loan negotiated by him, and were 
largely taken by importers because they could use them in 
paying duties.-"^ 

The secretary invited proposals at par for the balance of 
the June loan of 1860. Only three bids, aggregating $12,000, 
were received, and these were " made imder misapprehension." 
Failing to obtain money by that law, he issued, by authority 
of the March Act of 1861, more treasury-notes to offerers at 
par, and in payment to public creditors to the amount of 
$12,584,550. 

Such were the resources derived from loans and treasury- 
notes by the secretary during the first four months of the 
administration of his office. From customs during the last 
quarter $5,515,552 had been received, beside a small addition 
from sales of public lands and miscellaneous sources. 
' 44 Hunt's Mer. Mag., p. 667. 



1861.] FINANCIAL LEGISLATION OF CONGEESS. 11 



CHAPTER II. 

FmANCIAL LEGISLATION OF CONGRESS. 
JULY, 1861. 

Congress convened on the 4th of July, 1861. The rep- 
resentatives of the Southern States were not present, and 
the Republican party had a very large majority in both 
branches. Secretary Chase presented a report in which he 
considered, first, the receipts and expenditures for the year; 
secondly, the appropriations made and required ; and, last, 
the modes of providing the money for them. 

The amount required for the fiscal year 1862, which began 
on the 1st of July, 1861, was the following : 

To discharge appropriations of former years . $20,121,880 70 
To discharge ordinary appropriations for the fiscal 

year 1862 69,588,989 38 

To discharge the war appropriations . . . 217,168,850 15 

To pay treasury-notes 12,639,861 64 

To pay interest on the new debt . . . 9,000,000 00 



4 $318,519,581 87 

The secretary remarked that duties on imports, which were 

the chief source of ordinary revenue, would not furnish all 

the money required, and that the deficiency must be supplied 

from loans.' His opinion was, that $240,000,000 should be 

* "The problem to be solved," remarked the secretary in his report, 
" is that of so proportioning the former to the latter, and so adjusting the 
details of both, that the whole amount needed may be obtained with 
certainty, with due economy, with the least possible inconvenience, and 



12 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

obtained by borrowing, and that " not less than $80,000,000 
should be provided by taxation." He recommended " only 
such modifications of the existing tariff as would produce the 
principal part of the needed revenue, and such resort to direct 
taxes, or internal duties or excises, as circumstances might 
require in order to make good whatever deficiency might be 
found to exist." The modifications in the tariff law proposed 
by him were the taxation of articles then exempt from dut}', 
and an increase of the rate on those which were lightly taxed. 
The most important article under the latter head was sugar ; 
on the free list were coffee and tea. From these sources he 
estimated an additional duty of $20,000,000'. Other modifi- 
cations were recommended, which, if adopted, the secretary 
believed an annual revenue of $80,000,000 would be realized 
on the return of national prosperity. But for the current 
year, he remarked that provision should be made for raising 
at least $20,000,000 " by direct taxes, or from internal duties 
or excises, or from both." The Constitution required an 
apportionment of the former among the States in the ratio of 
federal population ; with respect to the latter, uniformity, 
simply in mode of assessment and collection among the States, 
was necessary. The secretary also "suggested that the 
property of those engaged in insurrection, or in giving aid and 
comfort to insurgents, might properly be made to contribute 
to the expenditures." He also favored retrenchment in ex- 
penditures by reducing ten per cent the salaries and wages 

with the greatest possible incidental benefit to the people. ... It will 
hardly be disputed that in every sound system of finance adequate provision 
by taxation for the prompt discharge of all ordinary demands, for the punc- 
tual payment of the interest on loans, and for the creation of a gradually 
increasing fund for the redemption of the principal, is indispensable." 



1861.] FINANCIAL LEGISLATION OF CONGEESS. 13 

paid by the general government, the abolition of the franking 
privilege, and the reduction of postal expenses. 

The next features of the report worth considering in this 
place were his recommendations for raising money by loans. 
The first of these was the opening of subscriptions for a 
national loan of $100,000,000, "to be issued in the form of 
treasury-notes, or exchequer-bills, bearing a yearly interest of 
7.3 per centum to be paid half-yearly, and redeemable at the 
pleasure of the United States after three years from date." 
Although the foregoing sum was specified for that form of 
loan, he did not intend to restrict it to "any precise limit short 
of the entire sum which might be required, in addition to the 
sums to be realized from other sources for all the purposes of 
the year." The above-mentioned rate of interest was " sug- 
gested because it was liberal to the subscriber, convenient for 
calculation, and, under existing circumstances, a fair rate for 
the government." 

His reasons for dealing liberally with subscribers should be 
mentioned, in view of his action afterward in dealing with 
them. " It is beneficial to the whole people that a loan dis- 
tributed among themselves should be made so advantageous 
to the takers as to inspire satisfaction and hopes of profit, 
rather than annoyance and fears of loss ; and, if the rate of 
interest proposed be somewhat higher than that allowed in 
ordinary times, it will not be grudged to the subscribers when 
it is remembered that the interest on the loan will go into the 
channels of home circulation, and it is to reward those who 
come forward in the hour of peril to place their means at the 
disposal of their country." These were wise words, truly ; 
what a vast burden of loss and suffering would the country 
have escaped had he remembered them ! 



14 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

If all the money needed could not be raised by that mode, 
the secretary proposed that bonds or certificates of debt should 
be issued to lenders "in this country or in any foreign 
country, at rates not lower than par, not exceeding in the 
aggregate $100,000,000, or, if expressed in the currency of 
Great Britain, not exceeding £20,000,000." The bonds were 
to be payable after January 1, 1862, if the government desired, 
and might run for thirty years. Seven per cent was proposed, 
payable in London and at the United-States treasury. 

The secretary finally recommended that provision be made 
for the issue of treasury-notes for ten, twenty, and twenty-five 
dollars each, payable one year after date, " to the amount of 
$50,000,000." The rate of interest proposed was 3.65 per 
cent, and the notes were to be exchangeable at the will of the 
holder for treasury-notes or exchequer-bills, payable after 
three years, bearing 7.3 per cent interest, or "be made 
redeemable on demand in coin and issued without interest." 
In either form, he added, treasury-notes of small denomina- 
tions might prove very useful if prudently used in anticipation 
of the revenue. In the closing sentence on this subject is 
clearly mirrored his opinion concerning fiat money. " The 
greatest care will, however, be requisite to prevent the degra- 
dation of such issues into an irredeemable paper currency, 
than which no more certainly fatal expedient for impover- 
ishing the masses and discrediting the government of any 
country can well be devised." 

Mr. Chase supposed that the war would be ended in a few 
months, and consequently that very heavy taxation or loans 
would not be needful. This was the prevailing opinion. 

The secretary's recommendations were embodied in bills 
prepared by himself or by his direction, which accompanied 



1861.] FtNANCIAT. LEGISLATION OF CO^'GEESS. 15 

his report. On the 5th of July the speaker laid the report 
before the House. The portion that related to the finances 
was referred to the Committee of Ways and Means, and to 
the Committee on Commerce was referred the portion 
relating to the collection of the revenue from customs. 
Thaddeus Stevens was chairman of the former committee, 
and E. B. Washburne, of Illinois, of the other. Four days 
afterward Mr. Stevens reported a loan bill which authorized 
the secretary to borrow $250,000,000. General debate 
thereon was limited to one hour, which was mostly occupied 
by Vallandigham, of Ohio, in opposing the measure. When 
he had finished, the bill was read and without debate was 
passed. It received one hundred and. fifty affirmative votes. 
Those who voted against it were Messrs. Burnett, of Ken- 
tucky ; Norton and Eeid, of Missouri ; Vallandigham, of 
Ohio, and Fernando Wood, of New York. Three days 
afterward the bill passed the Senate with slight amendments, 
in which the House concurred.' 

The secretary was authorized to issue coupon or registered 
bonds bearing not more than seven per cent interest, payable 
semi-annually, redeemable after twenty years at the pleasure 
of the United States, or he could issue treasury-notes in such 
proportions as he might deem advisable of any denomination 
not less than fifty dollars, and payable three years after date, 
with interest at the rate of 7.3 per cent per annum, payable 
semi-annually, and convertible at any time into twenty-years' 
six-per-cent bonds. As an alternative he could issue in 
exchange for coin, or pay for salaries or other dues, treasury- 
notes of a less denomination than fifty dollars, not bearing 
interest, and payable on demand by the assistant treasurers at 
' Act, July 17, 1861, 37 Cong., first session, chap. 5. 



16 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

Philadelphia, New York or Boston. Or, he could issue a 
third kind of treasury-note, bearing 3.65 per cent interest, 
payable in a year from date, and "exchangeable at any 
time for treasury-notes for fifty dollars and upwards." No 
exchange, however, could be made for a smaller amount than 
$100, nor could a note be issued of less denomination than 
ten dollars; the total amount also of non-bearing interest 
notes was limited to $50,000,000. Moreover, he could issue 
treasury-notes of any denomination specified in the law, bear- 
ing six per cent interest and payable in a year or less, to the 
amount of $20,000,000. Of the bonds he was authorized to 
issue, $100,000,000 could be negotiated in Europe. 

This was the first law that authorized the secretary of the 
treasury to borrow money. For seventy years that authority 
had been granted to the President and secretary. Mr. Chase, 
perhaps, when drawing the bill, was not familiar with loan 
legislation. No one was opposed to the change, nor was 
there, in truth, any reason for burdening the President with 
such a duty. The loan greatly exceeded in amount any 
previous one, and the provisions of the law were essentially 
those recommended by the secretary of the treasury. 

On the 5th of August ^ a supplemental bill was passed, 
which authorized the issue of bonds bearing six per cent 
interest, and payable at the pleasure of the government after 
twenty years from date, and for which treasury-notes bearing 
7.3 per cent interest might be exchanged. That Act also 
provided that five-dollar treasury-notes might be issued, and 
that all of " a less denomination than fifty dollars, payable on 
demand without interest, to the amount of $50,000,000, 
should be receivable in payment of public dues." 

^ Act, July 17, 1861, 37 Cong., first session, chap. 46. 



1861.] FIXAXCIAL LECilSLATION OF CONGRESS. 17 

A revenue bill embodj-ing the secretary's views was also 
introduced. This provided for increasing the duty on sugar, 
for taxing coifee five cents per pound ; black teas ten cents, 
and green teas fifteen cents a pound ; and the duties on many 
articles were considerably increased, especially on brandy, 
distilled spirits and wines, and on silks. The bill provided 
for a direct tax of $20,000,000, and an income tax of three 
per cent on incomes exceeding $800. This general provision 
of the law was modified in several respects. Income derived 
from securities of the United States was taxed only one and 
one-half per cent; but from the income of stocks, securities 
and other property existing in the country owned by 
American citizens residing abroad, a tax of five per cent was 
laid. They were favored, however, like persons living here 
on incomes derived from national securities. 

This measure occasioned a warm debate. The sentiment 
was intensely in favor of doing everything necessary to 
sustain the Union, yet the proposed expansion of the taxing 
power was enormous. Three distinct things were put into 
this law — an increase of the duties on imports, the collection 
of a direct tax, and of another from incomes. It was con- 
tended that the condition of commerce had so changed tliat 
the duties on some articles unless modified would prohibit 
their importation and consequently impair the revenue. Iso 
rates, however, were reduced, but many articles on the free 
list were subjected to taxation. There was more opposition 
to the imposition of the tax on coffee than on any other 
article. The secretary proposed five cents a pound; some 
members were very strenuous for a reduction to three. Finally 
a compromise was made, and the rate was fixed at four cents. 
From these changes it was expected that a large revenue 



18 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

would flow into the treasury. The law provided that goods 
could remain in bond no longer thau three months without 
paying new duties.^ 

The collection of a direct tax, while regarded necessary, 
was a grave expedient. All the members felt the full import 
of this legislation. The amount was fixed at $20,000,000, 
and apportioned among the States. 

The objections to an income tax were not so great. If 
honestly collected, this tax is considered by many who have 
well studied the subject one of the fairest that can be assessed; 
but as the desire to evade it is strong and general, and the 
facility for doing so great, the tax, in truth, is very objection- 
able. The law for collecting it went into effect on the 1st of 
January, 1862. 

Another revenue Act was passed this session, which pro- 
vided for obtaining the property of those who should aid, 
abet or promote tlie " insurrection or resistance to the laws, 
or any person or persons engaged therein." - The additional 
legislation necessary for collecting national revenues in the 
insurrectionary States was enacted early in the session.^ 

One of the serious lacks of the time was an inventory of 
the wealth of the country, without which no intelligent judg- 
ment could be formed of the probable yield of an internal 
tax. At a later period William Elder, C. J. Stille, and D. A. 
Wells prepared and published estimates of the national 
wealth. These, though only crude approximations, were 
helpful in several ways, especially in enabling the people to 
get a better conception of their capacity to endure the strain 

'Act, Aug. 5, 1861, 37 Cong., firet session, chap. 45. 

'Ibid., Aug. 6, 1861, cliap. 60. 

'Act, July 13, 1861, 37 Cong., first session, chap. 3. 



1861.] FmANCIAI. LEGISLATION OF CONGRESS. 19 

of war. ]\Ir. Wells's pamphlet, in particular, appeared at a 
gloomy titne, was extensively circulated, and proved a potent 
tonic in reviving the drooping energies of the people. 

Congress adjourned on the 6th of August, having matured 
and passed bills of momentous importance. The authority 
granted to the secretary of the treasury to raise money waa 
far greater than any predecessor had ever had, yet events 
justified the action of Congress. The war curtain had been 
drawn from an immense stage, and the loan authorized — . 
enormous compared with any other in our national history — 
was merely the beginning of a long series of borrowings. 
The increase in duties, though voted with reluctance by some 
members, was justified by the necessity for raising more 
money. Whatever effect this legislation may have had in 
stimulating home production, the sole object of it was to raise 
a larger revenue. 



20 FINANCIAL HISTORY OF THE UNITED STATES. [18G1. 



CHAPTER III. 

THE ONE HUNDEED AND FIFTY MILLION BANK LOAN. 

Hardly had Congress adjourned, when Secretary Chase 
started for New York to borrow money. On the evening 
of the 9th of August a meeting was held at the house 
of John J. Cisco, the assistant United-States treasurer, who 
had been continued in office, notwithstanding the change of 
party administration. He had well served the government, 
and the President acted wisely in retaining him. When per- 
sonal fitness shall be uniformly applied as a test for keeping 
men in office, the change will mark the beginning of a new 
era in national advancement more glorious in rational ex- 
pectation than any era already passed. 

At this meeting were assembled, beside Mr. Chase, bankers 
and other prominent men of New York. Mr. Coe^ the presi- 
dent of the American Exchange Bank, suggested the practica- 
bility of organizing the banks into an efficient and inseparable 
body, for the purpose of advancing the capital of the country 
on government - bonds in large amounts, and through their 
clearing-house facilities and other well-known expedients to 
distribute them in smaller sums among the people. This 
suggestion was heartily received, and, by request of the sec- 
retary, was presented to the representatives of a considerable 
number of banks, M'ho assembled on the following day. On 
that occasion a committee of ten were appointed to develop 
the suggestion into a plan for rendering assistance to the 



1861.] ONE HUXDEED AND FIFTY MILLION LOAN. 21 

government. On the 15th the committee reported. Thirty- 
nine of the New York banks were represented; the 
Philadelphia banks were represented by Messrs. Mercer and 
Patterson; and JNIr. Gray, of Boston, represented those of 
that city. " The report was cordially accepted and adopted 
by the banks in New York," while those in Boston and 
Philadelphia, through their representatives, " as zealously and 
cordially united in the organization." The co-operation of 
the banks of the West, though greatly desired, it was found 
impracticable to secure. 

The following plan was adopted : There should be an im- 
mediate issue by the government of |50,000,000 of treasury- 
notes, running for three years, and bearing interest from 
August 15th, at 7.30 per cent. The banks of New York, 
Boston, and Philadelphia were to unite in taking this amount 
at par, with the privilege of taking $50,000,000 more on the 
15th of October, and a similar amount two months later, 
unless the same should be previously subscribed as a national 
loan. The secretary was to negotiate no other government 
stocks, bonds or treasury-notes, except those payable on 
demand, and the Oregon war loan, which had been recently 
authorized, and was less than $3,000,000. Negotiations in 
Europe, however, were not restricted by this agreement with 
the banks. 

An appeal was to bo made by the government to the people 
to subscribe for these notes, and the banks were to subscribe 
in proportion to their capital. No bank, however, could 
subscribe for more than one-fifth of the amount. The agree- 
ment also specified that, "as the subscriptions for the notes 
progress, and the moneys are paid in, the same shall be paid 
over to the government or deposited with banks selected by 



22 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

the secretary of the treasury, with the concurrence of a 
committee of the associates ; and so much of the proceeds of 
said loan, as shall be required for the purpose, shall be 
applied in reimbursement of the associates for subscriptions 
by them paid in, but not otherwise reimbursed." 

The banks were to pay ten per cent of the sums subscribed 
forthwith to the assistant treasurers of the United States at 
Boston, New York, and Philadelphia, and the residue was to 
be placed to the credit of the United States on the books of 
the banks subscribing. Certificates were to be issued to each 
subscriber, stating the amount deposited, and, as the deposits 
•should be withdrawn or paid into the treasury, treasury-notes 
bearing 7.30 per cent interest were to be issued in equal 
amounts to the subscribers. When the deposits were entirely 
paid to the United States, treasury-notes for the first deposit 
of the banks were to be issued, and all notes issued to the 
subscribers were to bear even date with the certificates and 
carry interest from it. The agreement provided for the for- 
mation of a committee to represent the banks in the three 
cities in conducting the business. The eighth section of the 
plan set forth that " in addition to the banks of New York, 
Boston, and Philadelphia, it would be desirable that other 
parties should become associates, say, trust companies, savings 
banks, insurance companies, and private bankers, who, in lieu 
of pro rata of capital, should designate, when joining the 
association, what amount of interest they decide to take." * 

As soon as Mr. Chase had finished his negotiations with 

the banks, he returned to Washington and provided for 

"immediate exigencies" by issuing to public creditors who 

would receive them, or for cash, six-per-cent treasury-notes, 

' 16 Bank. Mag., p. 161. 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 23 



i,01 9,034 of which were payable in two years, and 
$12,877,750 in sixty days.^ Meantime, to ensure the success 
of the bank loan, the expedient of issuing clearing-house cer- 
tificates, and of appropriating and averaging all the coin in 
the various banks as a common fund, was adopted. This 
action was a continuation of the policy adopted by the banks 
in November, the previous year. At that time, foreseeing the 
future, they "deemed it wise to band themselves together, 
putting their coin into a common fund, and otherwise aiding 
each other, so as to enable them best to sustain their dealers, 
and by joint action to relieve the wants of the government, if 
it became necessary, to the largest possible extent." ^ Such a 
vast financial undertaking had never been attempted before in 
this country, nor was ever a similar one matured and put into 
execution so quickly. 

At the time of executing this agreement with the secretary 
of the treasury, " the credit of the government had become 
impaired to such a degree that a large loan could not be 
obtained in any ordinary way, nor even a small temporary 
loan, except for a very short period, at a high rate of interest. 

1 Ann. Treas. Report, 1861. 

^ Report of the Loan Com. of the Associated Banks, p. 11. The committee 
added that they believed the objects proposed by the banks at that time 
had been very fully obtained. " That in the future the banks will look 
back with just pride to the record of the past, borne by them in the most 
critical and eventful period known in the history of the country ; and that 
they may justly claim that by their foresight in organizing themselves, and 
their prompt action for the support of the government at the darkest 
moment of the past year, when they placed more than their entire capital 
at its command, almost without hope of profit, with ruin staring them in 
the face in the event of loss, that they did much to save the government 
from being overthrown and the country from being dismembered." 



24 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

Men's hearts failed them ; the rebellion was upon so large a 
scale, and had so unexpectedly broken out, and raged with 
such fury, that to subdue it seemed to most persons to be 
impossible. After careful deliberation and consultation with 
the secretary of the United-States treasury, the banks decided 
it to be wise for them to depart from their usual and legiti- 
mate business and sustain the government credit, and stand or 
fall with it. The Act restored the public confidence, and was 
the highest endorsement of the public credit that could then 
have been given." ' 

The bank capital thus associated aggregated $120,000,000, 
exceeding the capital of the Bank of England and the Bank 
of France. The banks that joined in the movement possessed 
the needful capacity for accomplishing the end, yet were free 
from the objection of acting as a single great corporation. 
Their financial condition was : 





Liabilities. 




DEPOSITS. 


CIRCULATION. 


ASSETS IN COIN. 


Banks of New York 


$92,046,308 
18,236,061 
15,335,838 


$8,621,426 
6,366,466 
2,076,867 


$49,733,990 
6,666,929 
6,765,120 








$125,617,207 = 


$16,964,749 


$63,166,039 



' Eeport of the Loan Com., p. 32. " When the banks agreed to advance 
their millions to the government, they did so without hope or expectation 
of profit from it, and they earnestly sought to obtain from the government 
the assurance that they should be indemnified from loss. It was not until 
five months after taking the first loan, and two months after taking the 
third, . . . that there was any reason to expect the securities to command 
in the market a price higher than that at which they had been taken."— 
Ibid., p. 32. 

' Their aggregate capital at that time was $120,000,000, New York banks 
having $70,000,000; Boston, 138,000,000, and Philadelphia, $12,000,000. 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 25 

They had therefore $63,165,039 in coin to meet $142,381,956 
of liabilities, or forty-iive per cent of the whole amount. 
" Surely," says a very high authority,^ " such conditions as 
these, with judicious administration, were adequate to the 
work which the country required. A great merit of this 
bank combination at that critical moment, ^\'hen the life of 
the nation hung in the balance, consisted in the fact that it 
fully committed the hitherto hesitating moneyed cajntal of the 
North and East to the support of the government. The 
bank officers and directors who thus counseled and consented 
were deeply sensible of the momentous responsibility which 
they assumed, but all doubt and hesitation were instantly re- 
moved, and perfect unanimity was secured by the question, 
' AVhat, if -we do not unite ? ' And, acting as guardians of 
a great trust exposed to imminent danger, they fearlessly 
elected the alternative best calculated to protect it." 

The problem for the banks to solve was, how could the 
available capital be drawn from the people and devoted to the 
support of the government with the least disturbance to the 
country, and by what means could 'arms, clothing, and sub- 
sistence for the army be secured in exchange for government 
credit. As these transactions were simply home exchanges, 
bank checks, deposits and transfers, the ordinary instruments 
of trade, were the best means for effecting them. To transact 
this business the most effectively the preservation of a specie 
standard by the banks was necessary, and this end in turn 
necessitated the least possible change in the coin reserve. 

"Accordingly, it was at once proposed to the secretary 
that he should suspend the operations of the sub-treasury 
Act (which required that nothing but coin should be accepted 
^ Geo. S. Coe, Spaulding, Appendix, p. 89. 



26 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

for any obligations due to the government) in respect to these 
transactions, and, following the course of commercial business, 
that he should draw checks upon some one bank in each city 
representing the association, in small sums, as required in dis- 
bursing the money thus advanced. By this means his check 
would serve the purpose of a circulating medium, continually 
redeemed, and the exchanges of capital and industry would be 
best promoted. This was the more important in a period of 
public agitation, when the disbursement of these large sums 
exclusively in coin rendered the reserves of the banks all the 
more liable to be wasted by hoarding. To the astonishment 
of the committee who represented the associated banks, Mr. 
Chase refused." The sub-treasury law had been suspended 
on the 5th of August, so far as to permit the secretary of 
the treasury to deposit any money obtained from loans then 
authorized by law to the credit of the treasurer of the United 
States, in such solvent specie-paying banks as he might 
select; and the money thus deposited might be withdrawn 
for deposit with the regular authorized depositories, or 
for the payment of public dues, or paid in the redemption 
of the notes authorized to be issued under that Act, or the 
Act to which it was supplementary, payable on demand, as 
might seem expedient to, or be directed by, the secretary of 
the treasury.^ This law was passed for the purpose of 
enabling the secretary of the treasury to adopt the policy 
recommended by the banks, but Mr. Chase declared, " upon 
his authority as finance minister, and from his personal 
knoAvledge of its purpose, that the Act had no such meaning 
or intent." Yet he M^as unquestionably wrong, and we can 
discover no ground on which his declaration can securely rest. 
^ 37 Cong., first session, chap. 46, sec. 6. 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 27 

Mr. Spaulding says that the primary object which Mr. Apple- 
ton and himself had in view in preparing the law, "was to 
relax the rigid requirements of the sub-treasury Act in regard 
to the receipt and disbursement of coin, and instead of pay- 
ing solely from coin deposits in the treasury, to allow all the 
money obtained on these loans to be deposited in solvent 
banks ; the United-States treasurer to draw his checks directly 
on such deposit banks in payment of war expenses, which 
checks would be paid in State-bank notes then redeemable on 
demand in gold, or in the ordinary course of business. To a 
large extent, they would pass through the New York Clear- 
ing-house and the clearing-houses of other cities, and be set- 
tled and cancelled by offset, without drawing large amounts 
of specie." The statement of Mr. Spaulding, who prepared 
the Act, must be regarded as the highest authority in this 
matter, consequently the declaration of the secretary cannot 
stand in the court of history. 

The bank committee clearly saw the importance of exercis- 
ing the authority conferred on the secretary by the above- 
mentioned Act to alter the mode of receiving and disbursing 
the public money. "The subject," says Mr. Coe, "was dis- 
cussed from time to time with much zeal, but always with the 
same result. To draw from the banks in coin the large sums 
involved in these loans, and to transfer them to the treasury, 
thence to be widely scattered over the country at a moment 
when war had excited fear and distrust, was to be pulling out 
continually the foundations upon which the whole structure 
rested. And inasmuch as this money was loaned to the gov- 
ernment, and was in no sense trust reposed in the banks, there 
appeared to them no reason why it should not be drawn by 
checks in favor of government contractors and creditors, who 



28 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

would require to exchange them for other values in commerce 
and trade through the processes of the clearing-house. And 
this consideration was greatly strengthened by the fact that 
these advances were made and the money publicly disbursed 
a long time before the treasury-notes were ready for delivery 
to the banks which had paid for them." 

The inquiry is pertinent for what purpose did ]\Ir. Chase 
suppose the Act in question was passed, and why was he so 
unwilling to take advantage of it in receiving and paying the 
public money ? One reason, doubtless, was, he did not com- 
prehend the importance of transacting the public business in 
the mode recommended by the banks, and for which the law 
Lad provided. Mr. Chase was emphatically a "hard money" 
man; he well knew the evils caused by using any other 
medium of payment, and he believed the government could 
continue to do business on a purely specie basis. He did not 
in the least comprehend that the vastly greater payments 
required an entirely different mode of making them. The 
banks were far wiser than the secretary. 

Another reason for Mr. Chase's aversion to receiving bank- 
notes was not wholly without foundation. Many of these 
institutions, particularly in the West, whence Mr. Chase 
came, had issued their notes with great recklessness. The 
banks in New England and the Middle States had been much 
more prudent and their circulation was safe. But many of the 
"Western banks had issued theirs on the security of Southern 
State bonds which, after the war began, were at a heavy dis- 
count.^ They were not required to keep a reserve of specie. 

' 16 Bank. Mag., pp. 5, 485, 486. Gov. Yates, of Illinois, remarked in his 
message to the Legislature in January, 1863 , " The outbreak of the present 
unexpected rebellion found us with a circulation of bank-notes under our 



1861.] OXB HUNDRED AND FIFTY MILLION LOAN. 29 

If the New-York banks, when dealing with Mr. Chase, erred 
in judging too highly of the confidence that ought to be given 
to the banks throughout the country, Mr. Chase erred far 
more in regarding all banks like the Western ones with which 
he was familiar, and whose record did not indeed justify the 
bestowal of much public confidence. 

Nevertheless the banks yielded, though they " would have 
conferred an incalculable benefit upon the country had they 
adhered inflexibly to their own opinions." But why did they 
yield when they saw so clearly the need of adopting the policy 
recognized by Congress, when authorizing the secretary to 
suspend the operations of the sub-treasury law ? " The pressure 
of startling events," says Mr. Coe, "required prompt decision, 
and the well-known intelligence and patriotism of the secretary 
gave to his judgment overwhelming power." 

Notwithstanding the unwillingness of the secretary to accept 
bank-notes and to employ the machinery for discharging 
obligations whicli the banks had perfected, he was not averse 
to the issue of demand-notes by the government, though 
having no coin to redeem them, and dependent on the banks 
for a supply. Early in August they were put into circulation 
by paying them to the clerks of the department for salaries, 
and to other creditors of the government. There was genuine 
reluctance to receiving them, and, in order to give them credit, 
the secretary and his assistant and other leading officers of the 
treasury department signed a paper agreeing to accept them in 

banking-law of over 812,000,000, secured by State and United-States stocks 
to the amount of over $13,000,000. About three-fourths of this sum was 
made up of stocks of the Southern States." As their credit was largely 
destroyed when they rebelled, their stocks depreciated in value, forty, fifty, 
or even more per cent. 



30 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

payment for their salaries. " The merchants and shop-keepers 
at Washington sought to discredit them ; " ' some of the rail- 
roads declined to take them in payment of fares and freight,^ 
and the banks plainly saw that coin payments could not he 
ipaintaiued if the transfers from them were to be intercepted 
and absorbed by the government. Nor could the banks 
receive such notes on deposit from the public as money while 
they \vere responding to the government and to their own 
dealers in coin. To the banks this was inflation in the most 

^Schuckers, p. 224. Mr. Schuckers adds, in a note (p. 225), that lie 
"probably brought the first of these notes to Philadelphia, and experienced 
a considerable difficulty in inducing the acceptance of one of them at the 
Continental Hotel. About the time of the suspension of cash payments, a 
wealthy New Yorker came into the possession of a large sum — approxi- 
mating to one million of dollars — in demand-notes. He offered them for 
deposit in a, leading bank in New York, the officers of which refused to 
receive them, however, in the ordinary course of their business, or in any 
other way than as a special deposit. Having no alternative, the gentleman 
reluctantly consented. The demand-notes being receivable for customs the 
same a.s coin, kept pace pari passu with the advance in the price of coin ; 
and when the depositor in the bank withdrew his deposit, demand- 
notes were worth nearly or quite one hundred and fifty per cent premium, 
measured in legal tenders ! " 

*Sec. Chase wrote, in his letter to the Committee of Ways and Means: 
" The making them a leg.al tender might, however, still be avoided if the 
willingness manifested by the people generally, by railroad companies, and 
by many of the banking institutions to receive and pay them as money in 
all transactions, were absolutely or practically universal ; but, unfortunately, 
there are some persons and some institutions which refuse to receive and 
pay them, and whose action tends, not merely to the unnecessary deprecia- 
tion of the notes, but to establish discriminations in business against those 
who in this matter give a cordial support to the government, and in favor 
of those who do not." — Cong. Globe, Feb. 4, 1862, p. 639. Opinion was 
much divided on the subject of issuing them. The banks generally were 
opposed to this step. 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 31 

embarrassing form. The secretary, therefore, was strongly 
solicited to refrain from exercising the discretionary power 
given to him to issue such notes until other means were 
exhausted. The secretary assured the banks of his acquiescence 
in their recommendation, but insisted that it was improper for 
a public officer to pledge himself openly not to exercise a 
power conferred by law.^ This statement was satisfactory to 
the banks, and they began to pay into the treasury in coin at the 
rate of about five million dollars at intervals of six days. As 
long as the secretary kept the treasury-notes out of the channels 
of circulation, the disbursements of the government were so 
rapid, and the movements of trade so intense, that the coin 
paid on each installment of the loan came back to the banks 
through the people in about a week. 

After taking, but before paying, the third installment of 
$50,000,000, the associated banks were in a strong position, 
and had not lost much specie. "It may be confidently affirmed 
that had the banks been permitted to exercise their own 
methods of exchanging the bonds [i. e., the 7.30 notes] for the 
varied products of industry required by the government, they 
could have continued their advances in sums of fifty millions 

•James Gallatin wrote to Mr. Chase, Sept. 12, 1861 : "When the pro- 
posed system of raising means by the banks was reported by a committee 
of ten, they were almost unanimously in favor of aifixing to it a condition 
that government should not issue demand-notes. That condition was only 
yielded from a reluctance to endanger or embarrass your appeal in so 
solemn a crisis, and because of your remonstrance against being compelled 
to give an official pledge against the use of a legal enactment ; and still 
further, because of your assurance that it would only be resorted to when 
other means of raising money should fail. The banks, therefore, feel the 
most implicit confidence that these issues will be confined to a very incon- 
siderable sum, and not be extended beyond a small amount, for which a 
specific fund will be pledged."— 16 Bank. Mag., p. 354. 



32 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

for an indefinite period, and until the available resources of 
the people had been all gathered in." 

When the secretary made his annual report on the 9th of 
December, he remarked that the objects of his arrangement 
with the associated banks were : 1. To place at the command 
of the government the large sums immediately needed for the 
payment of maturing trea.sury-notes, and for other disburse- 
ments, ordinary and extraordinary ; 2. To secure to the people 
equal opportunity with the banks for participating in the loan ; 
3. To avoid competition between the government and the 
associated institutions in the disposal of bonds ; 4. To facilitate 
and secure further advances to the government by the associates, 
if required ; and, 5. To insure, if possible, the maintenance of 
payments in specie, or its actual equivalents and representatives. 
All these objects, he continued, had been happily accomplished. 

The secretary faithfully sought to execute his agreement 
with the banks to borrow money from the people. An appeal' 
was made to them, and subscription books for a loan Avere 
opened in all the chief towns and cities of the loyal States. 
One hundred and forty-eight agents were appointed, who 
received one-fifth of one per cent on the first one hundred 
thousand dollars of subscriptions, and one-eighth of one per 
cent on additional amounts. Beside these commissions, a sum 
not exceeding one hundred and fifty dollars was allowed for 
advertising in a locality. The subscriptions received through 
these agents amounted to $24,678,866. The assistant treas- 
urers and designated depositaries of the treasury department 
sold a considerable quantity of notes, but the total subscriptions 
were insufficient to reimburse the banks, and the balance of the 
first fifty million loan was paid to them in seven-thirty notes.^ 
• 16 Bank. Mag., 290. ^ Report of the Loan Com., p. 14. 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 33 

The time had not yet come to float a "popular loan." 
Capital is usually timid in face of war. Nevertheless the 
banks of New York, Boston, and Philadelphia had set an ex- 
ample of loyalty and daring which the people ought to have 
imitated. Though capital was abundant, the owners hesitated 
to subscribe.' Moreover, the difficulties of conducting the busi- 
ness by the treasury department were very great. In discharg- 
ing the second installment of $50,000,000, the banks agreed 
with the secretary to take the seven-thirty notes, intending to 
sell them to the people. The accounts with the subscription 
agents therefore were closed, and the secretary simply delivered 
the notes to the baults and received the money for them.^ 

The third installment was negotiated with the associated 
banks on the 16th of November. The secretary agreed to 
issue $50,000,000 in six-per-cent bonds to them, at a rate 
equivalent to par, for bonds bearing seven per cent interest. 
This negotiation, though less favorable to the government — 
considered purely as a money transaction — ^than the two prior 
loans, in some respects was more advantageous. There was no 
contract for reimbursement, and no immediate expense to the 

'" It is a noticeable fact that forty-five out of the fifty millions (of the 
first installment above mentioned) were disposed of to the public as soon as 
practicable, at the cost price, without a dime's profit to the banks ; the 
people now being inspired with the necessary confidence by the fact that 
the associated banks trusted the government." — Letter of J. E. WiUiams, 
Pres. of Metropolitan Nat. Bank, to W. D. Kdley, Feb. 14, 1876. At first, 
the people subscribed quite freely for the bonds, and in September James 
Gallatin wrote cheerily to the secretary: "The plan so wisely adopted' for 
supplying the treasury by distributing the loan through the medium of 
banks is meeting a success exceeding all reasonable expectations." — 16 
Bank. Mag., p. 357. The public demand, however, did not long continue. 

2 Schuckers, pp. 227, 229, 342. Eep. of Loan Com., p. 16. 

3 



34 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

treasury beside preparing and issuing the bonds. An option 
also was given the associated banks to make a fourth advance 
of $50,000,000, after the 1st of January, on the same terms as 
the first and second advances, if required by the secretary. 

Although the secretary had assured ithe banks that he 
would not issue United-States notes payable on demand until 
other ways of getting money were exhausted, he treated 
the matter very lightly, for in JSTovember he began to 
issue such notes freely and without adequate cause, and he 
soon caused embarrassment among the banks, as had been 
predicted. The banks were pressed to receive the notes on 
deposit, and could not refuse without diminishing public con- 
fidence in the government credit; nevertheless, they could not 
give currency to them without impairing their own specie 
strength. The notes could be safely received only as a special 
deposit, which was not popular.^ The holders therefore de- 
manded specie for them, and the consequence was either its 

' Jlr. Geo. S. Coe, president of the American Exchange National Bank 
of New York, in describing, at a meeting of the Am. Bankers' Association, 
in 1877, the consequence of Mr. Chase's action in issuing these demand- 
notes, said: "These notes were irredeemable from the start. . . . The 
treasurer had no money excej^t that which the banks fui-nished, and, of 
course, it was impossible for him to issue a redeemable note. These notes 
were brought to the banks for deposit. We were requested to take them 
of our customers as money, and to allow them to draw against them in coin. 
. . . The very first week that they were issued we found it quite impossible to 
take them into our solvent currency. ... It was substantially like diluting 
a sound metallic currency with so much copper. You will see at once tliat 
the moment we introduced a thing not solvent into the solvent mass, we 
admitted a minus into a plus quantity. . . . We continued this until the 
31st of December, 1861, and it was then found that so much of the insol- 
vent had become incorporated into the solvent, that we could not go on and 
pay gold and receive something of lower value." — Proceedings, p. 24. 



18G1.] ONE HUNDRED AND FIFTY MILLION LOAN. 35 

withdrawal or less active circulation than before. During 
three weeks from December 7th, the reserves of the banks in 
New York fell to $29,102,715/ a loss of $13,000,000 within 
that short period, and, on the 28th of December, after con- 
ference with the secretary, in which he persisted in adhering 
to his policy, the banks voted to suspend specie payments 
on the succeeding [Monday. They clearly saw that their gold 
would soon disappear, and their suspension would be inevit- 
able, and so they wisely decided to shut down the gates at 
once and save the gold yet remaining." As the payment of 

• "From the 17th of August, 1861, to the 4th of January, 1862, the 
specie was decreased 625,750,112, in the New-York banks." — Bep. of Loan 
Com., p. 35. 

^"With an imperative demand on the one hand, and with diminished 
resources on the other, it became a question whether depletion should be 
allowed to proceed to its utmost limit, or whether the connection between 
the banks and the treasury should be broken in season to secure to the 
former, for ultimate use, so much of specie as still remained in their vaults. 
It was under these circumstances that the banks in New York resolved to 
suspend specie payments." — Annual Hep. of Banking Sup. of N. Y., 1862. 
James Gallatin said, at the meeting of bank officers who, on the 28th of 
December, 1861, voted to suspend specie payments: "The government 
must suspend specie payments, or we must; and it is only a question 
of a few more days' time as to who suspends first, and who shall hold 
the specie in our vaults. If we hold it, the people and the government 
will be alike benefited. If government takes it, the whole will be 
expended and hoarded by a few people. Indeed, the question for us to 
consider, as trustees of the people, now is, How much, if anything, can we 
help to preserve of the values which the approaching tornado of paper 
money threatens to sweep away? ... In order to preserve a basis for 
future values, we should endeavor to get and keep as much coin as possible, 
upon which to resume specie payments, whenever that can be done with 
safety. Contraction, for that purpose, must eventually be resorted to, and 
the more coin we have on hand the less severe will be the contraction." — 
16 Sank. Mag., p. 627. 



36 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

specie by the government depended on the action of the 
banks, it, too, suspended specie payments at the same time,' 
followed by the banks throughout the country. 

Thus, the policy of the treasury in requiring payments to 
be made in coin, contrary to the advice of the banks and the 
intention of Congress expressed in the repeal of the sub-treasury 
law, and in issuing demand treasury-notes though advised to do 
otherwise, speedily brought the secretary to the end of his road. 
He had repeated the experiment tried by the French finance 
minister Colonne in 1787, with the same result and in the 
same brief time. Unhappily, he dragged the banks down 
with the treasury,^ and entailed a long train of evil conse- 

' The amount of demand treasury-notes then in circulation was $33,- 
460,000. Annual Treas. Eeport, 1862, p. 9. 

'Mr. Van Dyck, bank superintendent of New York, said, in his annual 
report for 1862: "To their credit [the banks], be it spoken, met the 
exigency with a patriotism and liberality that excited surprise at 
home and abroad. Had they been met with a corresponding spirit on 
the part of those in authority ; had the burdens assumed been mitigated 
by prompt action on the part of the government in the delivery of 
its securities ; had the rigors of the sub-treasury system been mitigated 
by the use of the banks as depositories for loans, to be disbursed in the 
usual manner, through the use of checks, notes, and the usual credits, as 
the demands of the government might have required, there is every 
reason for believing the banks would not have been driven to the exigency 
of breaking faith with the public in respect to the redemption of their 
notes in specie. Even as it was, they scrupulously fulfilled their engage- 
ments with the government, and on the 4th of February, 1862, made their 
final payment on the $35,000,000 loan of November 16, 1861, although, at 
the date of such last payment, but $7,000,000 of the securities to be 
furnished had yet to be received. Nor was such payment made, as had 
been alleged on the floor of Congress, in the depreciated notes of the bank, 
but in coin and government notes, many of the latter being of the class 
receivable for customs." 



18G1.] ONE HUNDRED AND FIFTY MILLION LOAN. 37 

quences on the country, among the greatest of which was 
"the untimely recourse to legal-tender notes, the history of 
which will be soon given. Their issue would certainly have 
been delayed had he adopted the policy recommended by the 
banks, and the evil effects flowing therefrom would have been 
far less than those which followed. 

On the other hand, if the banks had not hesitated to em- 
ploy the demand treasury-notes like their own, the suspension 
of specie payments would have been deferred. If the banks 
bad received them on general deposit, they would have circu- 
lated like other notes. The effect of such action, it is 
true, would have been to increase their responsibility. And 
why should they be blamed for declining to assume this 
burden, since they could gain nothing by carrying it ? They 
had already done much for the government ; far more, prob- 
ably, than any of their accusers. Many banks doubtless de- 
sired to furnish the paper circulation needed by the country, 
and looked with disfavor on any attempt of the secretary to 
invade their field, and declined to receive the government 
notes, in order to maintain their position more securely. The 
secretary seemed determined to push the demand-notes into 
circulation, either supposing the banks would accept them in 
direct competition with their own notes, or expecting to draw 
their specie from them when paying the $150,000,000 loan, 
with which he could redeem the notes issued by the govern- 
ment. He must have seen that his policy was directly op- 
posed to the interest and safety of the banks. If they 
received the government notes, the paper circulation was 
expanded while the specie basis remained the same, thus 
endangering their own safety, and without getting the small- 
est benefit. If he drew specie from them, the greater the 



38 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

amount the more quickly he could force them to suspend. 
Sir Eobert Peel's father wrote to Parliament, in 1826, "Gold,, 
though in itself massy, often disappears in consequence of 
war, or speculation, nay, the breath of rumor itself is sufificient 
to disperse it." i\Ir. Chase's knowledge of the important 
part gold played in sustaining our financial system was of a 
cruder kind. If the banks had accepted the $50,000,000 of 
demand-notes, and Congress had stood firmly against further 
issues, this increase would have produced no serious result, 
and the question may be fairly asked, Were not the banks 
hasty in concluding that this "emission expressed a purpose of 
resorting to government paper issues to carry on the war " ? * 
At the time of suspending specie payments the banks could 
have continued their advances to the government had the 
secretary adopted the policy they recommended. He was 
"apparently unconscious of the resources of the banks, 
through the aid of bills of exchange, certificates of deposit, 

' Letter of George S. Coe on our early Financial War Measures. Spaul- 
ding, Appendix, p. 93. Amasa Walker asserted that specie payments 
could not have been maintained much longer, and that Mr. Chase pursued 
the right policy. " Blame has been thrown upon Mr. Chase for this 
suspension, but quite unjustly. That he might by some arrangement with 
the banks, in regard to the circulation of their notes, have postponed the 
suspension for a short time, we do not doubt ; but it could not long have 
been avoided. Mr. Chase had a broken-down currency to start with. The 
banks of the United States, on the 1st of January, 1861, had 6459,000,000 
of immediate indebtedness, while they held but |S7,000,000 of specie, equal 
to but nineteen cents on the dollar. How was it possible to go through a 
great war with a currency of so little strength ? It could not be done. 
Suspension was inevitable." — 52 Hunt's Mcr. Mag., p. 24, Jan., 1865. Jlr. 
Sherman said in a speech in the Senate, Feb. 27, 1865, " I still think that 
with the closest economy and heavy taxes from the beginning we might 
have borrowed money enough on a specie basis to have avoided specie 
payments." — Speeches, p. 81. 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 39 

drafts and checks, as well as notes, for the transaction of any 
volume of business yet required by the exigencies of the 
country." Were not payments to the amount of twenty 
millions daily effected in New-York City without coin and 
notes'? The daily settlement of an additional million or so 
of government indebtedness could have been easily and safely 
effected by employing the same machinery. Before entering 
into the conference with the banks on the 28th of December, 
some of the members endeavored to impress on the secretary 
the importance of continuing his relation to an organization 
which combined so much experience, capital, and financial 
resource, and which was capable of rendering to the govern- 
ment invaluable services. If an irredeemable paper currency 
were inevitable, it would be more expedient, it was contended, 
and more economical, for the government not to become 
involved with the banks. As a suspension of coin payments 
was soon to be declared, it was practicable to preserve from 
distribution the forty millions of coin then owned by the 
banks, while the one hundred and fifty or sixty millions of 
government bonds held by them could be used as a special 
security for $200,000,000 of notes which could be imme- 
diately issued by the associated banks from their own plates, 
and be verified and made national by the stamp and signature 
of a government officer. Thus supported by coin and bonds, 
the notes would serve the temporary purpose required, with 
little, if any, deterioration l)elow coin value, and the banks 
could continue without difficulty to make their advances. 
But the secretary declined to entertain the recommendation, 
preferring the system of national banks, which he had just 
recommended in his report to Congress. 

In the light of subsequent events, Mr. Coe is fully justified 



40 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

in saying that " it must be admitted that this suggestion 
possessed true merit. It would have preserved," he affirms, 
"a coin basis for the currency, prevented the destructive 
expansion, relieved the government from its almost inextric- 
able entanglement with the circulating notes, and compelled 
an early restoration of coin payments. And, with a proper 
use of the expedients and machinery of banks, by utilizing 
their form of effecting exchanges, which was subsequently 
applied by the secretary in the national banking system 
without reserve, this amount would have been found suf- 
ficient. When we review the excessive cost of the ^var, the 
vast increase of the national debt, and the public and private 
evils which a profuse currency have entailed upon the 
country, it must appear evident that, in failing early to use 
and to exhaust all those means and appliances of commerce 
and banking that the experience of other civilized nations 
have proved most effective, a great and irreparable mistake 
was made." 

At the very beginning, therefore, Secretary Chase, disre- 
garding the advice of men far wiser and not less patriotic 
than himself, committed two great errors and which resulted 
in his precipitating the issue of legal-tender notes. 

In his next annual report, after mentioning that when he 
made his recommendations the year before, the banks had not 
suspended specie payments and there was reason to believe 
that the means for suppressing the rebellion would be obtained 
without resort to any other currency than that of coin and 
equivalent notes, he remarked that military delays, increased 
expenditures and " diminished confidence in public securities, 
made it impossible for the banks and capitalists who had 
taken the previous loans to dispose of the bonds held by them 



1861.] ONE HUNDRED AND FIFTY MILLION LOAN. 41 

except at a ruinous loss, and impossible for the government 
to negotiate new loans of coin except at a like or greater loss. 
These conditions made a suspension of specie payments 
inevitable." If, when writing his annual report in 1861, he 
supposed that the government could maintain specie pay- 
ments, he was not so wise as the banks; for "it became pain- 
fully certain to them " before his report appeared that an 
adherence to his policy " must inevitably lead to a general 
suspension of specie payments." He steered the treasury 
directly toward the breakers, not knowing where he was 
going. He was told that if he persisted in issuing treasury- 
notes he would inevitably cause a suspension of specie pay- 
ments ; but like his forerunner Demos in the Knights of 
Aristophanes, who was besought by them with strong reasons 
to return to his right mind, Mr. Chase distrusted his advisers 
and continued in his course until he could go no further. 

It has been maintained that the specie in the banks right- 
fully belonged to the holders of their notes, and therefore 
ought to have been used in redeeming them. The banks, it 
may be answered, did expect to redeem their notes ; they had 
no intention of permitting the holders to suffer. They 
reluctantly decided to delay payment, but were confident that 
their notes would not depreciate in value. It was their duty 
to deal justly by all, and if they had determined to redeem 
their notes until exhausting their specie, the consequence 
would have been the redemption of the notes first presented, 
and a failure caused by lack of coin to pay the remainder. 
This would not have been fair treatment of the noteholders. 
The notes of the State banks were redeemed in those of the 
government. 

The associated banks had invested more than their capital 



42 FINANCIAL HISTOEY OF THE UNITED STATES. [18G1. 

in the obligations of the government, and at the time of their 
suspension had not sold them.^ They were a heavy weight, 
but which would have been cheerfully borne had the secretary 
of the treasury shown either more wisdom or more willing- 
ness to learn from others in executing the duties of his office. 
The banks, when making this loan, had not a thought of 
making large profits. Their chief desire was to aid the govern- 
ment ; and this they did when its credit was lowest and when 
individuals prudently refrained from lending. Fortunately, 
the loan proved profitable," and then the banks were regarded 
like the " eight-per-cent patriots " of John Adams's time. It 
is not so easy to negotiate a national loan before a war as 
after its successful ending ; yet the banks, to their eternal 
honor, contracted this engagement, by far the largest of the 
kind ever made by our government, and faithfully fulfilled it 
amid the gloom that enveloped the country, and with the 
painful consciousness that the head of the treasury depart- 
ment, though j)0ssessing unquestioned integrity and political 
soundness, was neither skilled nor teachable in the momentous 
matters of national finance. 

^ At the meeting of bank officers, December 28, 1861, when they voted 
to suspend specie payments, James Gallatin said : " AVe are now loaded 
down with government securities, which we cannot sell." — 16 Sank. Mag., 
p. 027. 

^ The secretary wrote to Mr. Cisco, United-States treasurer at New 
York, May 24, 1862, " That the result to the banks of their advances to 
the government has more than realized the anticipations expressed by me 
to them is a source of great satisfaction to me; but it does not at all 
diminish my estimate of the value of their support of the government by 
large advances at a time when that result was regarded by the best judg- 
ments of the country as more than doubtful." 



1868.] THE ISSUE OF I.EGAL-TEXDEE NOTES. 43 



CHAPTEE IV. 

THE ISSUE OF LEGAL-TENDEE NOTES. 

Two days after the banks and the government suspended 
specie payments, a bill was introduced into the lower House 
of Congress providing for the issue of demand treasury-notes, 
and declaring them to be a legal tender in payment of 
debts. The bill, though, was more than forty-eight hours old 
when introduced. Ever since the presentation of the secre- 
tary's annual report, a sub-committee of Ways and Means 
had been preparing a bill to create the national bank system 
recommended by Mr. Chase, but, while thus engaged, con- 
cluded " that it would not be passed and made available quick 
enough to meet the crisis then pressing upon the government 
for money to sustain the army and navy." Mr. Spaulding, 
one of the members, drafted a legal-tender treasury-note 
section, " hoping, at first, that it might be made available by 
issuing legal-tender- notes direct from the treasury, while the 
bank-bill was put in operation throughout the country." 
This section of the bill read : " For temporary purposes, and 
until the circulating notes authorized by this Act shall be 
issued and put into circulation by corporations and associa- 
tions, to the aggregate amount of $100,000,000, the secretary 
of the treasury be, and he is, hereby authorized to issue $50,- 
000,000 of treasury-notes on the faith of the United States, 
payable on demand, without specifying any place of payment, 
and of such denominations as he may deem expedient, not 



44 riNANCIAL HISTORY OF THE UNITED STATES. [1862. 

less than five dollars each, which shall be receivable for all 
debts and demands due to the United States, and for all 
salaries, dues, debts and demands owing by the United States 
to individuals, corporations and associations within the United 
States ; and such treasury-notes shall also be a legal tender in 
payment of all debts, public or private, within the United 
States, and shall be exchanged at any time at their par value 
the same as coin, at the treasury of the United States and the 
oifices of assistant treasurers in New York, Boston, Philadel- 
phia, St. Louis, and Cincinnati, for any of the coupon or 
registered bonds which the secretary of the treasury is now, 
or may hereafter be, authorized to issue ; and such treasury- 
notes may be re-issued from time to time as the exigencies of 
the public service may require." ' 

The foregoing section was eliminated from the bank-bill 
and introduced into the House as a separate bill on the 30th 
of December, and referred to the Committee of Ways and 
Means. 

The committee consisted of nine members. Beside the 
chairman, were Justin S. Morrill, of Vermont; John S. 
Phelps, of Missouri ; Elbridge G. Spaulding, of New York ; 
Valentine B. Horton, of Ohio; Erastus Corning, of New 
York ; Samuel Hooper, of Massachusetts ; Horace Maynard, 
of Tennessee, and John L. N. Stratton, of New Jersey. No 
speaker could have made a better selection. 

Daring the war of 1812, when the public credit had become 
impaired, a bill authorizing the issue of legal-tender notes was 
introduced into Congress, but promptly rejected. Mr. Dallas, 

' The latter portion of the section related to signing the notes, and re-en- 
acted the law of December 23, 1857, authorizing the issue of treasury-notes 
so far as it did not conflict with the foregoing enactment. 



1868.] THE ISSUE OP LEGAL-TENDER NOTES. 45 

who was then at the head of the treasury department, wrote 
to the Committee of Ways and Means, " that the extremity 
of that day cannot be anticipated when any honest and en- 
lightened statesman will again venture upon the desperate 
expedient of a tender law." The dreadful effects of sub- 
merging the country with legal-tender paper money during 
the Revolution were vividly realized by him ; nor had they 
in truth, even in his time, entirely passed away. In 1839, 
Erskine Hazard, editor of the " United States Register," ^ 
urged, in his paper, and in letters to members of Congress, 
the issue of national legal-tender notes to the States in propor- 
tion to their representation. They were to be deposited by 
each State in its banks as a basis for bank circulation in place 
of gold. Happily, the country was spared many years from 
the use of this expedient. 

As soon as Mr. Spaulding's bill was printed " it was taken 
up in the Committee of Ways and Means and duly considered. 
Mr. Hooper took active ground in favor of the bill. Mr. 
Stevens, at first, had some doubts about its constitutionality, 
but very soon decided to support the measure. Mr. Morrill, 
Mr. Horton and Mr. Corning actively opposed the bill in the 
committee and in the House. Mr. Maynard and Mr. Stratton 
took no active part in the discussions while the bill was under 
consideration in the committee. It is believed, however, that 
Mr. Maynard was favorable to the bill from the start, while 
Mr. Stratton was very much in doubt what course he would 
take in relation to it, either in committee or in giving his vote 
in the House. Mr. Phelps was absent, and took no part while 
the bill was under discussion in the committee. The com- 
mittee, therefore, were quite equally divided over the measure." 
•Vol. i. pp. 139, 270. 



46 FINANCIAL HISTOEY OF THE UNITED STATES. [1863. 

One of the questions wliicli troubled the committee was a 
constitutional one. The attorney-general, Edward Bates, was 
asked for his opinion, and, though declining to give it, wrote 
an unofficial note, in which he maintained that " the Constitu- 
tion contains no direct verbal prohibition, and I think it con- 
tains no inferential or argumentative prohibition that can be 
fairly drawn from its expressed terms. The first article of 
the Constitution, section eight, grants to Congress specifically 
a great mass of power.\ Section nine contains divers limitations 
upon Congress, upon the United States, and upon individuals ; 
and section ten contains restrictions upon the several States. 
This last section is the only one that treats on tender. ' Xo 
State shall make anything but gold and silver coin tender in 
payment of debts.' This applies to a State only, and not to 
the nation ; and thus it has always been understood with 
regard to the next preceding clause in the same section. ' No 
State shall emit bills of credit.' The prohibition to emit bills 
of credit is quite as strong as the prohibition to make any- 
thing but gold and silver coin a legal tender ; yet, nobody 
doubts — Congress does not doubt its power to issue bills of 
credit. Treasury-notes are bills of credit, and I think the 
one is just as much prohibited as the other — neither is for- 
bidden to Congress." 

When the committee first voted on reporting the bill they 
were evenly divided. Mr. Stratton finally consented to vote in 
favor of the measure so that it might be reported to the House. 
In this way the bill passed through the Committee of Ways 
and Means. No essential alteration had been made, except to 
increase the amount of notes to $100,000,000. 

Immediately after introducing the bill, the voice of the 
critic was heard in many places. Mr. Spaulding, in replying 



1868.] THE ISSUE OP LEGAL-TENDER NOTES. 47 

to one, declared that the committee advocated the measure 
not from " choice," but from " necessity." In his letter, which 
was dated the 8th of January, he briefly set forth the condition 
of the finances at that time. " We M'ill be out of means," he 
says, " to pay the daily expenses, in about thirty days, and 
the committee do not see any other way to get along till we 
can get the tax-bills ready, except to issue, temporarily, 
treasury-notes. We must have at least $100,000,000 during 
the next three months, or the government must stop payment. 
With the navy, and an army of 700,000 men in the field, we 
cannot say that we will not pay." The necessity for passing 
the measure became more and more apparent, and many who 
at first were opposed to it changed front. This was notably 
the case with many of the most influential journals. Congress 
could devise no other way for getting the money needed soon 
enough, and money, of course, must be had to sustain the war. 

Delegates from the banks visited Washington and met the 
secretary of the treasury at his oflice.^ At the meeting, the 
banks of Boston, New York, and Philadelphia were repre- 
sented, most of the members of the Finance Committee of the 
Senate were present, as well as the House Committee of Ways 
and jMeans, the secretary of the treasury, and other gentlemen 
representing boards of trade of various cities. 

The action of the Committee of Ways and Means in re- 
porting the legal-tender bill was the cause of their assembling. 
James Gallatin, President of the Gallatin Bank of New York, 
made the principal speech against issuing legal-tender notes, and 
on behalf of himself and those representing the banks of the 
three cities mentioned, and of the boards of trade, submitted 
the following plan for raising money to carry on the war : 

' January 11. 



48 FINANCIAL HISTORY OF THE UNITED STATES. ri863. 

1. A tax-bill to raise, in the diiferent modes of taxation, 
$125,000,000 over and above duties on imports. 

2. ISTo demand treasury-notes were to be issued, except those 
authorized at the extra session in July last. 

3. Issue $100,000,000 treasury-notes at two years, in sums 
of five dollars and upwards, to be receivable for public dues 
to the government, except duties on imports. 

4. A suspension of the sub-treasury Act, so as to allow the 
banks to become depositaries of the government of all loans, 
and to check on the banks from time to time, as the govern- 
ment may want money. 

5. Issue six-per-cent twenty-year bonds, to be negotiated by 
the secretary of the treasury, and without any limitation as to 
the price he may obtain for them in the market. 

6. The secretary of the treasury to be empowered to make 
temporary loans to the extent of any portion of the funded 
stock authorized by Congress, with power to hypothecate such 
stock, and, if such loans are not paid at maturity, to sell the 
stock hypothecated for the best price that can be obtained. 

The only feature of this plan which received the favorable 
regard of tlie Senate and House committees and Mr. Chase, 
was the first, relating to taxation. The meeting adjourned 
without maturing any plan for raising money to support the 
government. 

Subsequently the bank delegates and other persons con- 
sulted with Mr. Chase,^ and the result was an approval of 
the secretary's plan for raising money, and launching the 
national bank system. The following plan was then matured 
and adopted : 

1. The banks will receive and pay out the United-States 
'January 15. 



V 



1868.] THE ISSUE OF LEGAL-TENDEE NOTES. 49 

notes (authorized by Act of July last) freely, and sustain in 
all proper ways the credit of the government. 

2. The secretary of the treasury will, within the next two 
weeks, in addition to the current daily payments of $1,500,000 
in United-States notes, pay the further sum of at least 
$20,000,000 in seven-thirty bonds to such public creditors as 
desire to receive them, and thus relieve the existing pressure 
upon the community. 

3. The issue of United-States demand-notes not to be 
increased beyond the $50,000,000 authorized by the Act of 
last July, but it is desired that Congress should extend the 
provisions of the existing loan Acts passed at the extra 
session in July, so as to enable the secretary to issue in 
exchange for United-States demand-notes, or in payment to 
creditors, notes payabl^ in one year, bearing 3.65 per cent 
interest, and convertible into seven-thirty three-years' bonds, 
or to borrow under the existing provisions to the amount of 
$250,000,000 or $300,000,000. 

4. It is thought desirable that Congress should enact the 
national currency bank-bill, embracing the general provisions- 
recommended by the secretary in his annual report. 

5. It is expected that this action and liquidation will? 
render the making of the United-States demand-notes a legal 
tender, or their increase beyond the $50,000,000 authorized 
in July last, unnecessary. 

With respect to the first plan, Mr. Spaulding says that 
"the press spoke out plainly against the secretary being 
authorized to put United-States bonds on the market with- 
out any limitation as to the price he might obtain for 
them." The plan adopted by the secretary contained no such 
recommendation. As the plan recommended by the banks 

4 



50 FINANCIAL HISTORY OF THE UNITED STATES. [1802. 

at the first meeting containing this feature was not adopted, 
no one ought to have been disturbed by anything it con- 
tained. 

The committees of the Senate and House withheld assent, 
and the majority of the Committee of Ways and Means ad- 
hered to the legal-tender bill " as being a more available plan, 
and on a much larger scale. They believed it was necessary 
to authorize immediately an additional issue of $100,000,000 
of United-States fundable-notes to circulate as money and be 
made a legal tender; and that $500,000,000 six-per-cent 
twenty-years' bonds should be authorized, so as to enable the 
holders of the notes, when issued, to fund tliem at any time in 
these bonds." 

Accordingly, an additional section was framed and adopted 
by the Committee of Ways and Meaus " to enable the secretary 
of the treasury to fund the treasury-notes and floating debt of 
the United States," authorizing him " to issue, on the credit of 
the United States, coupon bonds, or registered bonds, to an 
amount not exceeding $500,000,000, in sums of $100, $200, 
$500, $1000, $5000, $10,000, and $20,000, and in such pro- 
portions of each as the exigencies of the public service may 
require, bearing interest at the rate of six per cent per annum, 
redeemable, after twenty years, at the pleasure of the United 
States, which bonds the secretary of the treasury is hereby 
authorized to deliver at their par value to any creditor or 
creditors having demands due against the United States in 
payment thereof, and to deliver the same to officers, employers, 
and individuals, in payment for services rendered, for supplies, 
subsistence and materials furnished to the United States ; and 
he may also exchange such bonds at any time for lawful 
money of the United States, or for any of the treasury-notes 



1862.] THE ISSUE OF LEGAL-TENDER NOTES. 61 

that have been, or may hereafter be, issued under any former 
Act of Congress, or that may be issued under the provisions 
of this Act." At the same time the title of the bill was thus 
amended : " An Act to authorize the issue of United-States 
notes, and for the redemption or funding thereof, and for 
funding the floating debt of the United States." 

A conference was held with Mr. Chase over the bill, and 
several amendments were suggested which related to limiting 
the place for exchanging notes for bonds to the treasury at 
Washington, and preventions against counterfeiting. The 
bill was left with him for examination, and when returned to 
the committee it was accompanied M'ith a letter, in which, 
after describing several minor modifications, he closes with 
" regretting exceedingly that it is found necessary to resort to 
the measure of making fundable-notes of the United States a 
legal tender, but heartily desires to co-operate with the com- 
mittee in all measures to meet existing necessities in the mode 
most useful and least hurtful to general interest." 

The bill was again reported in January, as a substitute for 
the bill previously introduced providing simply for the issue 
of §100,000,000 legal-tender notes, and made the special order 
for consideration on the 28th of the same month. " Each 
day's delay made it more and more apparent that the bill 
must pass in order to meet the overwhelming demands made 
upon the treasury to sustain the army and navy. The end 
seemed to justify the means contemplated by the bill." 

In opening the debate/ Mr. Spaulding stated that there 
was at that time over $100,000,000 of accrued indebtedness 
in different forms which ought to be soon paid. " "With this 
large accrued indebtedness, and with the prospect that (unless 

' January 28. 



52 FINANCIAL HISTORY OF THE UNITED STATES. [1862. 

this bill is adopted) the government will put on the market, to 
the highest bidder, a still further issue of bonds, to the 
amount of $250,000,000 to $300,000,000, to pay current 
expenses to July next, it is not expected that even the present 
price of United-States stocks can be maintained if forced on 
the market at this time. We have the alternative, either to 
go into the market and sell our bonds for what they will 
command, or to pass this bill, or find some better mode— if 
one can be devised— to raise means to carry on the war. 
The secretary has the means of defraying the daily expenses 
required to be disbursed from the treasury for only a few 
days longer. He has on hand about one-fifth of the loan 
made in November last, a small portion of the demand 
treasury-notes authorized by the Act of July, say, $10,000,000 
not yet issued, and such of the remaining 7.3-10 and 3.65 
treasury-notes authorized by that Act as can be used in paying 
contractors for supplies, and for salaries and other government 
dues, to such persons as are willing to receive them. With the 
enormous expenditures of the government, to pay the extraordi- 
nary expenses of the war, it requires no extended calculation to 
show that the treasury must be supplied from some source, or 
the government must stop payment in a very few days." 

He then described the difficulty in borrowing money. 
"You cannot borrow of capitalists any more money on 
twenty-years' seven-per-cent bonds, nor on your 7.3-10 treas- 
ury-notes at the rates fixed by the Act of July last. If you 
offer to the people, and put on the market, $300,000,000 
more, to the highest bidder, in the present aspect of affairs, 
they would not be taken, except at ruinous rates of discount. 
That policy would depreciate the bonds already taken by the 
banks and the people who are the most loyal to the government, 



1862.] THE ISSUE OF LEGAL-TEXDER NOTES. 53 

and who came forward as your best friends and furnished the 
means so much needed during the last few months to organize 
your army and navy; and, besides, depreciation would 
greatly increase the debt by requiring a much larger amount 
of bonds to be issued than would be needed if your loans 
were taken at par. A loan put upon thettnarket in the 
present depressed state of United-States stocks, to be followed 
by other lai-ge loans, is not regarded as a favorable mode of 
providing the means for maintaining the government at the 
present time. If it had been adopted at first it might possibly 
have been the best mode ; but it is now too late to essay that 
plan, and I believe it would be ruinous to adopt it. I fear 
the twenty-years' six-per-cent bonds would, under the pres- 
sure, fall to seventy-five, seventy, sixty, and even fifty cents. 
This would be a ruinous mode of raising the means to carry 
on the government." 

What, then, was to be done ? The secretary of the treasury 
had suggested two modes — the issue of demand treasury-notes, 
and a national bank currency secured by a pledge of govern- 
ment stocks. His recommendations were made before the 
suspension of specie payments, an event which the secretary 
had not expected. The plan for launching a new banking 
system could not be hastily matured and put into operation, 
and after that was done a considerable time would elapse 
before government would be much benefited by it. The 
same thing was true in respect to the measure for increasing 
the revenues of the government, "The duties received at 
the different custom-houses, and the taxes levied at the extra 
session or that may now be levied," said Mr. Spaulding, "will 
be wholly inadequate to meet the requirements of the treasury 
in the present emergency during the next six months." 



54 FINANCIAL HISTORY OF THE UNITED STATES. [1862. 

"If you cannot borrow the money on the credit of the 
United States, except at ruinous rates of discount, and cannot 
realize the amount required from your tariff and tax-bills, in 
what mode can the means be obtained, and the government be 
carried on ? It is believed that the only way in which it can 
be done is by fcsuing treasury-notes payable on demand, and 
making them a legal tender in payment of all debts, public 
and private, and by adequate taxation to be enforced by new 
bills." 

The debate flamed highest around the question of the con- 
stitutionality of the bill. This question was discussed in the 
opening speech, and by nearly all who participated in the dis- 
cussion. The most elaborate speech against its constitution- 
ality was delivered by Mr. Pendleton, of Ohio, exhibiting 
great learning and a thorough mastery of the subject. The 
secretary's letter, which we have given, was regarded by a 
majority of the Committee of Ways and Means, and by many 
others, as colorless on this point, and not a few believed that 
if he were pressed to declare his opinion it would be against 
the constitutionality of the bill. In order to obtain his opin- 
ion more fully, Mr. Corning offered a resolution when the 
measure was in the possession of the Committee of Ways and 
Means, referring it to the secretary, and requesting him to 
communicate to the committee at as early a day as possible 
his opinion of the propriety and necessity of immediately 
passing the bill. The resolution having been adopted, and 
the bill sent, the secretary, after considerable delay, replied 
that " the condition of the treasury certainly needs immediate 
action on the subject of affording provision for the expendi- 
ture of the government both expedient and necessary. The 
general provisions of the bill submitted to me seem to be 



1863.] THE ISSUE OF LEGAL-TENDER NOTES. 55 

well adapted to the end proposed. There are, however, some 
points which may, perhaps, be usefully amended. 

" The provision making United-States notes a legal tender 
has doubtless been well considered by the committee, and 
their conclusion needs no support from any observation of 
mine. I think it my duty, however, to say, that in respect 
to this provision my reflections have conducted me to the 
same conclusions they have reached. It is not unknown to 
them that I have felt, nor do I wish to conceal that I now 
feel, a great aversion to making anything but coin a legal 
tender in payment of debts. It has been my anxious wish 
to avoid the necessity of such legislation. It is, however, at 
present, impossible, in consequence of the large expenditures 
entailed by the war, and the suspension of the banks, to pro- 
cure sufficient coin for disbursements ; and it has, therefore, 
become indispensably necessary that we should resort to the 
issue of United-States notes. The making them a legal ten- 
der might, however, still be avoided if the willingness mani- 
fested by the people generally, by railroad companies, and by 
many of the banking institutions, to receive and pay them as 
money in all transactions, were absolutely or practically uni- 
versal ; but, unfortunately, there are some persons and some 
institutions which refuse to receive and pay them, and whose 
action tends not merely to the unnecessary depreciation of the 
notes, but to establish discrimination in business against those 
who, in this matter, give a cordial support to the government, 
and in favor of those who do not. Such discriminations 
should, if possible, be prevented ; and the provision making 
the notes a legal tender, in a great measure at least, prevents 
it, by putting all citizens, in this respect, on the same level, 
both of rights and duties." 



56 FINANCIAL HISTORY OP THE UNITED STATES. [1862. 

The debate continued and the treasury was getting low. 
Early in February the secretary wrote to Mr. Spaulding, 
" Immediate action is of great importance. The treasury is 
nearly empty. I have been obliged to draw for the last in- 
stallment of the November loan ; so soon as it is paid, I fear 
the banks generally will refuse to receive the United-States 
notes. You will see the necessity of urging the bill through 
without more delay." 

In this letter he also reiterated his opinions concerning the 
constitutionality of the bill. " It is true that I came with 
reluctance to the conclusion that the legal-tender clause is a 
necessity, but I came to it decidedly, and I support it ear- 
nestly. I do not hesitate when I have made up my mind, 
however much regret I may feel over the necessity of the 
conclusion to which I came." Such are the utterances of Mr. 
Chase with respect to the constitutionality of the bill when 
under discussion by Congress. 

On the 4th of February, by consent of the House, Mr. 
Morrill offered a substitute, which had the sanction of one- 
half the Committee of Ways and Means, Mr. Stratton, one of 
the members, having changed his mind, and forced the sub- 
stitute instead of the bill first reported. 

Mr. Morrill remarked when explaining the bill that he did 
not object to the issue of United-States notes to a limited 
extent to circulate as currency. But he did wish to have the 
amount marked by metes and bounds, and based on a solid 
foundation, and be the full equivalent of standard coin. 
This could be done by fixing the amount and by providing 
taxation sutficient to retire them or to maintain their full 
value. But he protested against making anything a legal 
tender except gold and silver. He proposed no new issue of 



1862.] THE ISSUE OP LEGAL-TENDER NOTES. 67 

treasury-notes, but to leave the fifty millions already authorized 
to be issued and re-issued as might be found necessary or con- 
venient. This would secure us against an inflated currency. 

" Then," he continued, " it is proposed to issue $100,000,- 
000 in United-States notes, bearing interest at the rate of 3.65 
per cent, payable at the pleasure of the United States, and 
allowing them, with accumulated interest, to be received for 
all debts and demands (taxes included) due to the United 
States, except duties on imports, and exchangeable at 
the will of the holder, whenever presented in sums 
not less than fifty dollars, for United-States seveu-aud- 
three-tenths per-cent coupon or registered stock. They 
are also to be received at par, with accumulated interest, 
for any bonds the government may hereafter issue. These 
are to be paid out for all salaries, debts, and demands due to 
individuals and corporations, at their option, within the United 
States. In substance this is very like English exchequer- 
notes issued in anticipation of revenue. It is most probable 
that these notes would maintain their credit at or near par ; 
and if there should be any difference between these and gold, 
it would be an honest difference visible to all men. As they 
accumulate they will be funded and returned, or re-issued, 
as the exigencies of the government may require. They 
equip the treasury as well as any legal-tender paper could do, 
while bearing interest they would not pass into the general 
volume of the currency, and they afford the only possible 
channel of obtaining any considerable sums to be consolidated 
into stock. They cannot exceed the amount of internal du- 
ties that will be levied, which will create a sure and constant 
demand for these notes, and sustain their credit in every State 
and territory in the country." 



58 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

The notes were not to be received for imports. For this 
purpose only coin could be used, which was to be paid as 
interest on the bonds issued by the government.^ It was also 
proposed to issue $200,000,000 in bonds, payable in ten years 
with interest semi-annually in coin, at the rate of 7.3 per 
cent, and $300,000,000 of bonds payable in twenty-five years, 
bearino- six per cent interest payable in like manner. This was 
the rival plan before Congress, and it certainly evinced quite 
as wide and deep knowledge of the situation as the other. 

The treasury was getting lower every day. Money or other 
available means must be obtained immediately. The sec- 
retary could no longer delay payment without ruining the 
credit of the government. The secretary had authority under 
the loan Act of July, 1861, to issue $46,000,000 of treasury- 
notes, bearing 3.65 per cent interest, or to issue seven-thirty 
notes, but he could not issue either kind at par. The seven- 
thirty notes would not be accepted at a discount less than two per 
cent, and the 3.65 notes at a greater one. The rate of interest 
was too low to attract investors ; and as the notes were not a 
legal tender they could not be employed as money. The 
needs of the treasury were so pressing that the 6th of February 
was fixed as the day for closing the debate in the House and 
taking the final vote on the bill. Its passage was assured, for 
the opinions of the members had been ascertained. Thaddeus 
Stevens, chairman of the Committee of "Ways and Means, 
closed the debate, reaffirming what was said in the beginning, 
that the bill was " a measure of necessity, not of choice." He 
also remarked that the banks had continued to pay the loan 
which they had agreed to take, but since the suspension of 
specie payments they had paid not in coin but in demand- 
' See page 155. 



18G3.] THE ISSUE OF LEGAL-TENDER NOTES. 59 

notes of the government, which had kept them at par. The 
last of this loan had been paid the day before, and as soon as 
ihat transaction was finished they refused to receive any more 
treasury-notes. " They must," he said, " now sink to a de- 
preciated currency." The remaining $50,000,000 of the July 
loan the secretary had been unable to negotiate, except a small 
portion of it, about $10,000,000, which lia.l been issued at 
7.3 per cent in payment of debts. The floating debt then 
existing, audited and unaudited, was at least $180,000,000. 

He further maintained that " without the legal-tender clause 
the notes could not be kept at par. Brokers, bankers, and 
others would depreciate them. The national bank scheme 
recommended by the secretary might, in ordinary times, be 
very useful, but while the banks are under suspension it was 
not easy to see how it would relieve the goverument. They 
would have the circulation without interest, and at the same 
time would draw interest on the bonds and aflFord no immediate 
relief." He thought the government should have the benefit 
of the circulation of legal-tender notes, and did not see how 
we could get along in any other way. He did not think that 
any more beside the $150,000,000 would be needed. No one 
would seek them for investment. Money circulated so I'apidly 
that it purchased ten times its value in a year. " This money," 
he said "would soon lodge in large quantities with the 
capitalists and banks, who must take them. But the instinct 
of gain would not allow them to keep it long unproductive. 
Where could they invest it? In United-States loans at six per 
cent redeemable in gold in twenty years, the best and most 
valuable and permanent investment that could be desired. 
The government Avould thus again possess such notes in 
exchange for bonds, and again reissue them. I have no doubt 



60 FINANCIAL HISTORY OF THE UNITED STATES. [1862. 

that thus the $500,000,000 of bonds authorized would be 
absorbed in less time than would be needed by government ; 
and thus $150,000,000 would do the work of $500,000,000 
of bonds. When further loans are wanted, you need only 
authorize the sale of more bonds ; the same $150,000,000 of 
notes will be ready to take them." ' 

Mr. Stevens was wholly correct in maintaining that those 
who took these notes would not keep them " long unproduc- 
tive." His second proposition was equally true that if bonds 
were issued by the government investors could replace their 
treasury-notes with them. But would they ? He was very 
sanguine ; the future turned hope into a disappointing reality. 
He discussed the various plans that had been proposed, and 
concluded by saying that unless the bill passed with the legal- 
tender clause, it was not desired, either by its friends or by 
the administration, that it should pass at all, and those who 
voted with him would vote against it if it were mutilated or 
emasculated.^ 

Two amendments were made before the final vote was 
taken, which are of sufficient importance to be stated. One 

' He said that the highest sum for which the bonds could be sold " would 
be seventy-five per cent, payable in currency itself at a discount. That 
would produce a loss which no nation or individual doing a large business 
could stand a year." He did not believe that any one would convert notes 
into bonds. 

''In this speech Mr. Stevens remarked that certain bankers had " suggested 
that the immediate wants of the government might be supplied by pledg- 
ing 7.3 per cent bonds, with a liberal margin, payable in one year, to the 
banks, who would advance a portion in gold and the rest in currency. The 
effect would be that government would pay out to its creditors the depreciated 
notes of non-specie-paying banks, and as there is no probability that the 
pledges would be redeemed when due, they would be thrown into the 
market and sold for whatever the banks might choose to pay for them." 



1868.] THE ISSUE OF LEGAL-TENDER NOTES. 61 

of these increased the amount of notes to $150,000,000, but 
the $50,000,000 authorized by the July Act of the previous 
year fs^ere to be retired, malving this the maximum limit ; 
the other gave holders the option to convert them either into a 
twenty-years' bond, at six per cent, or a five-years' bond, 
at seven per cent. There were other amendments, which 
need not be described. The bill passed by a vote of ninety- 
three to fifty-nine. 

The treasury was nearly empty, and the secretary was una- 
ble to negotiate another loan under the July law of 1861, at 
the rates therein prescribed. The six-per-cent twenty-year 
bonds were then selling at about eighty-eight, and the 7.3 
notes were below par. In this emergency Secretary Chase 
urged the immediate passage of a bill giving temporary relief. 
The Senate Finance Committee sent a bill to the Legislature, 
providing for the issue of $10,000,000 of treasury-notes pay- 
able on demand, which were to be deemed a part of the 
$250,000,000 loan authorized at the extra session in July, 
1861. The bill was immediately passed by that body, and 
three days afterward by the House.^ 

On the 10th of February the legal-tender bill was reported 
by the Finance Committee of the Senate, with numerous 
amendments, the most important of which were : 

6. That the legal-tender notes should be receivable for all 
claims and demands against the United States of every kind 
whatsoever, "except for interest on bonds and notes, which 
shall be paid in coin." 

9. That the bonds authorized by the bill should be " re- 
deemable in five years, and payable in twenty years from the 
date thereof." 

1 Act, Feb. 12, 37 Cong., second session, chap. 20. 



62 FIXAXCIAL HISTORY OF THE UNITED STATES. [1868. 

15. That the secretary miglit dispose of United-States 
bonds, " at the market value thereof, for coin or treasury- 
notes." 

18. A new section, authorizing deposits in the sub-treas- 
uries at five per cent, for not less than thirty days (and 
which could be withdrawn after ten days' notice), to the 
amount of $25,000,000, for which certificates of deposit might 
be issued. 

19. An additional section "that all duties on imported 
goods, and proceeds of the sale of public lands," etc., should 
be set apart to pay coin interest on the debt of the United 
States, and one per cent for a sinking fund. 

Senator Fessenden, the chairman of the Finance Commit- 
tee, explained the amendments. With respect to the sixth, 
he remarked that under the provisions of the House-bill, a 
creditor of the gOA'ernment, holding its paper, notes or bonds, 
would be compelled to take his interest in notes, or bonds, as 
the case might be, when the time for paying interest arrived. 
The Senate amendment, if passed, required the government to 
provide coin for the payment of interest. The object of this 
provision was not only to do justice, but raise and support 
the public credit. It would prove the good faith of the gov- 
ernment that it would spare no effort at wliatever cost to give 
those who took government paper something besides that for 
interest. 

The committee, so he explained, had provided a specific 
fund in order to accomplish that end. At first it was pro- 
posed to raise this by requiring the duties on imports to be 
paid in coin, but such a requirement of the importers was 
deemed by the committee hardly fair. " The result would be 
to make a distinction between different classes of the com- 



1363.] THE ISSUE OF LEGAL-TENDER XOTES. 63 

munity, aud to impose a very heavy burden upon those who 
are engaged in trade, and who would be called upon to pay 
duties. If we provide a paper currency, the natural and 
inevitable etfect of it is that coin increases in price. The 
consequence would be, unquestionably, that those obliged to 
pay import duties might be compelled to make a severe 
sacrifice in order to raise the coin to pay the duties ; and, in 
the next place, the general effect would be to, in effect, 
increase the duties provided by our tariff. Necessarily, if 
coin appreciates, if it becomes worth more than the ordinary 
currency, and duties are to be paid in coin, the effect of such 
a provision would be to increase the duties, which are already 
very high, and in some cases almost prohibitory. The com- 
mittee, therefore, thought that, under the circumstances, that 
would not be wise ; although, it will be perceived that, not 
having done so, the converse of the proposition may be true : 
that the effect, if we inflate the currency by paper, and allow 
the duties to be paid in paper, is necessarily to diminish the 
imports, and thus, perhaps, to lead to a greater importation." 
Having rejected this mode of getting coin the committee 
resorted to the modes set forth in the amendments above 
stated. 

Nevertheless, importers were required to continue the pay- 
ment of duties in coin, just as they had previously done. 
Many objections were afterward raised to this employment of 
specie, especially by those who wished to banish it wholly 
from the monetary world. Yet even James II., though so 
greatly in need of money when in Ireland that he collected 
brass and copper of the basest kind, and coined those metals 
into pieces having a nominal value of five pounds, forbade 
their employment in paying the duties on foreign importa- 



64 FINANCIAL HISTOEY OF THE UNITED STATES. [1863. 

tions, or in repaying money left in trust or due on mortgages, 
bills, and bonds. 

Another amendment related to the issuing of certificates of 
deposit. " This provision," said Mr. Fessenden, " was very 
much desired by the banks in all the cities. It was thought 
that it would afford them facilities that would give greater 
currency to the notes, that it would enable them to deal with 
them better." The amendment encountered the opposition 
of Senator Sherman, who contended that it would retard the 
conversion of treasury-notes into bonds, and also convert 
the sub-treasuries into banks of deposit. A person, he 
said, might deposit one thousand dollars in the treasury 
at New York, and get a certificate therefor which lie 
could send to San Francisco. In due time it would come 
back, but during the interval the depositor would get five per 
ceut from the government " while the whole arrange- 
ment was merely for the convenience of the depositor and 
no one else." This reason for opposing the amendment is 
a striking illustration of the varying effect produced on dif- 
ferent minds by the same cause. One object in passing the 
amendment was to convert the sub-treasuries into places of 
deposit. And why? This question was answered by the 
chairman of the Senate Finance Committee, Mr. Fessenden. 
He said that the banks lived on deposits ; thoss in the great 
cities especially did not have a large circulation. " We want 
to induce them to take the [government] notes on deposit ; 
and if we provide a place where, if they do not take them 
on deposit, they can be deposited by individuals, it is a strong 
pressure brought to bear upon the banks to give the notes a 
currency by taking them and passing them themselves." 
Another reason for the amendment orioinated with the bank- 



1868.] THE ISSUE OF LEGAL-TENDER NOTES. 65 

ers. They said the notes would necessarily accumulate at the' 
banks, and temporarily be unemployed. If, during such a 
period, interest could be obtained by depositing them with the 
government, this would be a strong reason for taking them. 
For this reason the amendment was particularly desired by 
the banks in Philadelphia.^ Many members in both houses 
did not regard the amendment with favor, fearing either the 
effects above stated, or other injurious ones which could not 
be foreseen. That the conversion of notes into bonds might 
not be checked, a higher rate of interest was to be paid on 
them than on deposits. 

Having explained the amendments of the committee, he 
proceeded to discuss the bill. After admitting that if it were 
necessary to issue legal-tender notes to sustain the government 
he should have no hesitation in doing so, he questioned 
whether the government had arrived at that stage, and whether 
something better could not be done than to pass this measure. 
He then stated his objections to the bill in a very brief, 
pointed way, which are worth reproducing here. 

" The first," he said, " is a negative objection. A measure 
of this kind certainly cannot increase confidence in the ability 
or the integrity of the country. It can make us no better 
than we are to-day, so far as this foundation of all public 
credit is concerned. 

" Next, in my judgment, it is a confession of bankruptcy. 
"We begin and go out to the country with the declaration that 
we are unable to pay or borrow at the present time, and such 
a confession is not calculated to increase our credit. 

" Again, say what you will, nobody can deny that it is bad 

faith. If it be necessary for the salvation of the government, 

'See Cong. Globe, Feb. 12, 1862. 
5 



66 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

all considerations of this kind must yield ; but, to make the 
best of it, it is bad faith, and encourages bad morality, both 
in public and in private. Going to the extent that it does, to 
say that notes thus issued shall be receivable in payment of all 
private obligations, however contracted, is, in its very essence, 
a wrong, for it compels one man to take from his neighbor, in 
payment of a debt, that which he would not otherwise receive 
or be obliged to receive, and what is probably not full 
payment. 

" Again, it encourages bad morals, because, if the currency 
falls, as it is supposed it must, else why defend it by a legal 
enactment, what is the result? It is, that every man who 
desires to pay off his debts at a discount, no matter what the 
circumstances are, is able to avail himself of it against the 
will of his neighbor, who honestly contracted to receive some- 
thing better." 

Th'S; pther reasons advanced by him were, that the measure 
would inflict a stain on the national honor, that it would 
change the values of property and cause inflation, and that 
the loss resulting therefrom would fall most heavily on the 
poor. He urged taxation, good faith and economy as the 
best means of maintaining the credit of the government. The 
bill was ably debated in the Senate, and finally passed that 
body by a vote of tliirty to seven. 

The bill having been amended in the Senate, further action 
thereon was needful by the House. The five amendments 
previously mentioned were the most objectionable to the 
members, and we will briefly show what the House did with 
them. 

All laws authorizing loans from the organization of the 
government had provided for the payment of "dollars." 



1863.] THE ISSUE OF LEGAL-TENDER NOTES. 67 

This word had a well-known meaning under our coinage and 
legal-tender laws, and many members were opposed to any 
discrimination in favor of the bondholders. The House, 
however, concurred in the Senate amendment to pay the 
interest on bonds and notes in coin, and also in the fifteenth 
amendment authorizing the secretary of the treasury to sell 
bonds at their market value. The House, after amending the 
eighteenth amendment, concurred in it, but did not concur 
with the Senate in the ninth and nineteenth amendments. 
The House, on the recommendation of a committee of con- 
ference, receded from their action on these also, save a slight 
change in the amendment relating to the creation of a sinking 
fund. Thus the principal Senate amendments were adopted 
by the House. The bill, as finally amended, passed the 
House by ninety-seven votes against twenty-two. In the 
Senate there was no division of the vote. The President 
approved the bill, and thus it became a law.' No financial 
measure of modern times has produced such far-reaching con- 
sequences, and it was therefore fitting to give this minute 
history of its origin and growth. The debates in Congress 
and discussion elsewhere showed that the probable effects were 
well understood, for the issuing of paper money by govern- 
ments is an old device, the awful operation of which has been 
recorded in luminous language. The measure had not the 
slightest tinge of originality. Spain, Russia, France, and 
other countries had indulged in similar financial experiments, 
and their results are among the most familiar facts of 
history. When St. Simon told the Duke of Orleans that the 
finances of the greatest king in Europe ought not to be 
managed like those of a private person, the regent solicited 
> Act, February 25, 37 Cong., second session, chap. 33. 



68 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

the financial genius of John Law, and the nation found the 
philosopher's stone in a paper mill. Many thought like the 
regent when fiat money was first manufactured by the 
American government. It is true that others favored this 
measure, honestly believing that by no other could a monetary 
supply be obtained. A much larger number rejoiced over the 
adoption of the measure, because they believed in the efficacy 
of fiat money. They were the enemies of banlis and bank- 
notes, and believed that government should issue the entire 
paper money, and knew no reason why this valuable and 
highly profitable privilege should be granted to individuals 
without reward. This class have always existed since the 
founding of the government, and exist to-day. Doubtless 
many of them were not wise, many were dishonest, and saw, 
if the measure were adopted, an easy way to pay their debts ; 
nevertheless, the dishonest, ignorant, and equally selfish men 
who differ from the believers in fiat money are not scarce. 

The measure rested mainly on the foundation of an 
" absolute overwhelming necessity." If this did really exist, 
who could take excejjtion to the ringing words of Senator 
Fessenden, when he said, " I would advocate the use of the 
strong arm of the government to any extent in order to 
accomplish the purpose in which we are engaged. I would 
take the money of any citizen against his will to sustain the 
government, if nothing else was left, and bid him wait until 
the government could pay him. It is a contribution which 
every man is bound to make under the circumstances." Mr. 
Fessenden did not believe the time had come for resorting to 
such an expedient to get money for the government. He 
showed that the country was rich, and though our credit had 
been somewhat injured by the conduct of the war, it was not 



1868.] THE ISSUE OF LEGAL-TENDEE NOTES. 69 

gone. The national credit was low when the administration 
came into power, and Secretary Chase in a few months had 
committed serious blunders, Avhich were disheartening ; if, 
instead of inventing paper wings for money as soon as the 
banks had suspended specie payments, the President had 
selected Mr. Fessenden, or another man equally competent, to 
manage the treasury department, the banks would have co- 
operated with him, and new loans would have been negotiated. 
But it was hopeless to attempt to work with Mr. Chase. It is 
true that the issue of legal-tender notes might have been 
necessary at some period of the war,^ but the fires of patriotism, 
which were now everj-where burning brightly, were not mere 
cornstalk illuminations. Men were ready to assist not only 
in sending soldiers, but in lending their money just as soon as 
the secretary showed efficiency in borrowing and in spending it. 

^ Senator Sherman said, in a Senate speech, Feb. 27, 1866, " I still think 
that, with the closest economy and heavy taxes from the beginning, we 
might have borrowed money enough on a specie basis to have avoided a 
suspension of specie payments." In an excellent essay on the legal-tender 
Act, by F. A. Walker and Henry Adams, they remark : " The common im- 
pression undoubtedly is, that even though there were no actual necessity 
for a law of legal tender so early as February, 1862, yet at some subsequent 
time the enactment of such a law would have proved inevitable. . . . 
Without venturing at present on any absolute denial of the theory, . . . 
it is only fair to say that, although the subject is scarcely capable at present 
of positive demonstration, there is absolutely no evidence to prove that the 
government might not have carried the war to a successful conclusion 
without the issue of a single dollar of its legal-tender paper."— iV. Am. 
Renew, April, 1870. Secretary Fessenden said, in the Ann. Treas. Report, 
1864: "Resort to some other species of currency of a national character 
became unavoidable, as was unanswerably demonstrated by my predecessor 
in his report of December, 1862. Fraught with danger as government 
paper has almost invariably proved, there was, under the circumstances, no 
other resource." 



70 FINANCIAL IIISTOEY OF THE UNITED STATES. [1868. 

It must be remembered, too, how much the cry of " absolute 
necessity " had been intensified since the first introduction of 
the bilL By fastening sharply on that expedient, and 
neglecting every other, a great many had come to believe that 
really an " absolute necessity " did exist for issuing a forced 
paper money. 

Nevertheless, beside the members of Congress who believed 
the measure to be necessary were many others whose opinions 
were worth much. The government could no longer pay 
gold and silver, and the demand treasury-notes, authorized in 
July, did not circulate freely. Individuals, railroad compa- 
nies, and banks refused to receive them. After the suspen- 
sion of specie payments, the banks paid the remainder of their 
loan to the government in treasury-notes, and after completing 
this engagement, declined to recognize them. Consequently, 
they were worth less than bank-notes. Yet the opinion 
widely prevailed that the government ought not to depend on 
irredeemable bank-notes for money .^ It was feared that with 

' Secretary Chase said, in his annual report, Dec. 1862 : " There remained 
but one other possible way of raising money by the negotiatiofi of bonds in 
the usual mode. That way was, to receive in payment of loans the 
notes or credits of the banks in suspension. . . . The negotiation of such 
loans to the extent required by the public exigencies would create a de- 
mand for the notes which would involve the necessity, at first, of sacrifices 
not greatly inferior to those attendant on coin loans. If subsequent nego- 
tiations should become practicable at seemingly better rates, it would be 
because the government demand had stimulated the making and issuing of 
bank-notes to an extent far beyond the ordinary needs of business. The 
increase of circulation thus stimulated would be unlimited, except by the 
.possibility of obtaining interest on loans of it ; or, in other words, by the 
possibility of obtaining credit for it with the community and the govern- 
ment. . . . Loans negotiated in this circulation would be simply exchanges 
of the debts of the nation, bearing interest and certain to be paid, for the 



1862.] THE ISSUE OF LEGAL-TENDEE NOTES. 71 

no restraint whatever on their issues the banks would enor- 
mously inflate their circulation. After the suspension of 
specie payments in 1812 the banks, released from the demands 
of billholders for gold and silver, issued notes in enormous 
quantities. Would not the banks, if the opportunity oc- 
curred, be strongly allured by the hope of gain to repeat their 
former action ? Moreover, the government had no right to 
receive them. The sub-treasury law was in operation, and 
the government could legally receive only gold and silver and 
treasury-notes. As resources of some kind were needful in 
order to live, and specie could not be employed, the govern- 
ment must either depend on the circulation of the banks or 
issue one of its own. And if the issuing of government- 
notes was the best plan and the most generally favored, should 
they be endowed with the legal-tender quality or be issued 
without it ? On that question public opinion strongly favored 
the issue of legal-tender notes. Said Senator Sherman, in a 
speech on this subject : "Almost every recognized organ of 
financial opinion in this country agrees that there is such a 
necessity in case we authorize the issue of demand-notes." 
The secretary of the treasury had declared, in his official com- 
munications to the Senate and in private conversation with 
members of the Finance Committee of that body, that the 
notes must be made a legal tender to insure their negotiabil- 
ity. The same view was entertained by the chambers of 
commerce of Boston, New York, and Philadelphia. The 
cashier of the Bank of Commerce of New York, speaking 

debts of a multitude of corporations, bearing no interest and certain, in 
part, never to be paid." James Gallatin showed how an excess of bank 
circulation might be prevented by " taxation more or less prohibitory."— 
See Nalumal Finances and the Currency, 1862, p. 8. 



72 riNANCIAL HISTORY OF THE UNITED STATES. [1863. 

for that bank and other banks of New York, " stated explic- 
itly " to the Finance Committee of the Senate that they "could 
not further aid the government unless the proposed currency 
was stamped by and invested with the legal form and author- 
ity of lawful money, which they could pay to others as well 
as receive themselves." " If you strike out this legal-tender 
clause," said Senator Sherman, in blazing language, " you do 
it with the knowledge that these notes will fall dead upon the 
money market of the world ; that they will be refused by the 
banks ; that they will be a disgraced currency, that will not 
pass from hand to hand ; that they will have no legal sanc- 
tion ; that any man may decline to receive them, and thus 
discredit the obligations of the government." Legal-tender 
notes, therefore, were the best substitute for gold and silver in 
making payments to the government that could be devised, 
and far more acceptable to the people than irredeemable 
bank-notes. 

In these reasons was rooted the necessity for issuing legal- 
tender notes. Whether they were as strong as they appeared 
to be we shall not attempt to decide.^ The opinions of men 
equally intelligent, candid, and patriotic, were divided con- 
cerning the necessity of issuing legal tenders in 1862, and 
probably always will be. The entire course of history is 
strewn with unsettled questions; nor is this to be regretted; for 
it consequently possesses a deeper interest and more keenly 
stimulates the investigating and judicial spirit of man. 

The people were quickly reconciled to the measure. Many 
had heartily favored it from the beginning. This was true 
of the debtor and speculative classes ; the latter class espec- 
ially, with their keen instincts for making money, knew that, 
'See Spear's Legal-Tender Acts, chap. 12, p. 88, The Plea of Necessity. 



1868.] THE ISSUE OF LEGAL-TENDER NOTES. 73 

with the general derangement of prices which was sure to 
follow an inflation of the circulating medium, a golden 
opportunity would appear for them to exercise their peculiar 
powers. They flourish when the storm rages hardest ; in calm 
waters they are like a ship whose sails are uselessly suspended 
in the air. Nothing could please them better than a deluge 
of cheap money. Moreover, the tune of " absolute necessity " 
had been played so much that all the people had learned it 
well, and they loyally bowed to this expression of legislative 
wisdom, having faith that however destructive the impending 
monetary revolution might prove to be, the cause of the Union 
would finally triumph. 



74 FINANCIAL HISTOEY OF THE UNITED STATES. [1863. 



CHAPTER V. 

MORE LEGAL-TENDER NOTES. 

Whenever a paper money spring has been found, the 
discoverers have not been perfectly happy until the stream 
issuing from it has swelled to a mighty flood. When the bill 
authorizing the first issue of legal-tender notes was before 
Congress, several members prophesied a heavy increase, while 
others were equally confident that no more would be needed 
or put into circulation. Said Mr. Hooper, of Massachusetts, 
who had carefully studied monetary questions for many years, 
" It is said that when a government once assumes the power to 
issue a currency, the temptation to continue issuing it rather 
than to resort to the more unpopular method of taxation is so 
great, that it will not cease to issue it until it finds itself in a 
state of utter bankruptcy. The answer to this objection is, that 
the power of the government is limited by the law in this 
respect to $150,000,000, and consequently the government can 
not, if it would, yield to any such temptation." What a lofty 
conception had Mr. Hooper of the virtue of the government ! 
It could not yield to the temptation to issue more paper 
money. Not so thought Mr. Morrill of Vermont. " If the 
first step were taken," he said, "in making paper a legal 
tender, we must go on. No sane man would spontaneously 
take stock liable by the practices of the government to be 
reduced the very next day ten per cent, or any other per cent, 
in its value. So that if Congress should have the virtue to 



1863.] MORE LKGAL-TENDEE NOTES. 75 

wish to cease the further issue of tliese notes, it would no 
longer be an open question. But, having tested this facile 
mode of paying debts, I fear the stern and honest mode of 
taxation would be repugnant to many constituencies, and 
that the doors of the temple of paper money would not 
soon again be closed. Gentlemen may think otherwise, but, 
like a certain heroine who 

'Said she'd ne'er consent, and consented still,' 

Congress would consent. If we have not the virtue and the 
power to resist the temptation now, while our reputation is 
spotless, we shall have still less when the whole country 
becomes debauched." 

The country did not wait long to find out who was the true 
presager. Having tested the sweets of paper money, within 
a month after the enactment of the first legal-tender law. 
Secretary Chase requested that the demand-notes authorized 
at the session in July, 1861, and the ten millions on the follow- 
ing February, be declared a legal tender. His object in having 
them made a legal tender was to give them currency at the 
clearing-houses, and in all business transactions. When the 
Senate were discussing the bill. Senator CoUamer inquired 
whether, if it were passed, the amount of legal-tender notes 
would not be increased to $160,000,000. Senator Fessenden 
replied that the entire amount was limited to $150,000,000, 
and the issue of new notes would not exceed $90,000,000, 
except to replace the $60,000,000 in circulation. These, 
therefore, were endorsed with the legal-tender quality, and 
thereafter circulated as freely as the notes authorized by the 
February law. 

Hardly had three months passed before the secretary of the 



76 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

treasury sent a communication to the Committee of Ways and 
Means, accompanied with a bill providing for the issue of an 
additional $150,000,000 of legal tenders. This was on the 
7th of June. He stated that the daily receipts from customs 
were about |280,000, and that the average daily conversion 
of legal-tender notes into bonds did not exceed $150,000, 
while the daily expenditures exceeded $1,000,000. He 
further remarked that if Congress saw fit to authorize the 
amount proposed, it seemed highly expedient that such a 
portion as the public convenience should require be issued in 
denominations less than five dollars. Admitting the force of 
the objections generally advanced against issuing notes of a 
smaller denomination, he maintained that under the existing 
oircumstances of the country they did not apply. The 
burdens of the people, he maintained, should be made as 
tolerable as possible. If the restriction on the issue of small 
denominations was removed, the wants of the country would 
absorb a circulation of $25,000,000, and perhaps more. 
The interest on this circulation, say $1,500,000, would be 
saved to ,the tax-payers. " Payments to public creditors, and 
especially to soldiers, now require large amounts of coin to 
satisfy fractional demands less than five dollars. Great incon- 
veniences in payment of the troops are thus occasioned. 
With every effort on the part of the treasury to provide the 
necessary amount of coin, it is found impracticable always to 
satisfy the demand. When the amount required is furnished, 
the temptations to disbursing officers to exchange it for any 
small bank-notes that the soldiers or the public creditors will 
take, is too great always to be resisted. And even when the 
coin reaches the creditors it is seldom held, but passes, in 
general, immediately into the hands of the sutlers and others. 



1863.] MORE LEGAL-TENDER NOTES. 77 

and disappears at once from circulation. The inconvenience 
therefore, to the government and creditors from the absence of 
United-States notes of small denominations, are not compen- 
sated by benefits to anybody." Another reason advanced by 
him vras that resumption of payments in specie could be effected 
more surely and easily, and with less inconvenience and loss 
to the community, if the currency, both small and large, were 
composed of United-States notes, than if the channels of cir- 
culation were filled with the emissions of non-specie paying 
corporations. 

Slow as many persons were in perceiving the advantages of 
a purely paper currency, Secretary Chase could not be 
reckoned among the number. Possibly he was like an 
epicure who prefers a piece of dry bread to fasting ; judging 
from his conduct, however, he had been overcome by the 
paper money enchantment. The sage remark in his July 
report concerning the mode of issuing treasury-notes — that 
the greatest care would be requisite to prevent their degrada- 
tion into an irredeemable paper currency, than which no 
more certainly fatal expedient for impoverishing the masses 
and discrediting the government of any country can well be 
devised — had certainly been forgotten. 

One member of Congress, Mr. Spaulding, did clearly 
intimate when the first legal -tender bill was discussed by the 
House that a further issue of legal-tender notes might be 
necessary ; but " all others who discussed the subject utterly 
denied and repudiated the idea that they were ever to [favor 
the issue of] another similar batch. . . . When that bill was 
on its passage, the chairman of the Ways and Means Committee 
gave the House and the country a grave assurance, which 
was unquestionably sincere, that no further increase of such 



78 FINANfTAI. HISTORY OF THE UNITED STATES. [1868. 

notes would be required or solicited. The assurance gave 
much satisfaction to many gentlemen of prudence and sagacity 
and gained for the measure large support." Yet, how sud- 
denly did many members change their opinions. Not all of 
them changed, however, for some who favored the first issue 
were strongly opposed to the second. Doubtless Mr. Pike, 
of Maine, expressed the opinions of other members when he 
said that he voted for the first measure on the ground of 
necessity, but opposed the second because it rested on con- 
venience. 

The bill authorized the issue of $150,000,000 of notes, 
reserving one-half of the amount to secure the prompt pay- 
ment of deposits which were in the treasury. This amount 
could be issued and used " when in the judgment of the secre- 
tary of the treasury the same, or any part thereof, may be 
needed for that purpose." Many hoped and believed that 
only $75,000,000 of notes would be put in circulation. 

The §50,000,000 of demand-notes authorized in July could 
be used in payment for duties, and also ihe $10,000,000 issued 
on the following February; but the $150,000,000 of legal- 
tender notes could not thus be employed. Consequently, the 
first two issues had a special value, and in July, 1862, 
$50,000,000 were outstanding. There was another im- 
portant privilege attached to these issues, or " old demand- 
notes," as they were called. They could be funded into 
twenty-year six-per-cent bonds, which were worth par in 
specie at the time the legal-tender bill we are now describing 
was under consideration. It was believed, however, that these 
notes would soon be presented in large quantities, because, as 
they were receivable for duties, persons would prefer to use 
them, even if paying a premium therefor, to paying a higher 



1862.] MORE LEGAL-TENDER NOTES. 79 

premium for gold. They had therefore ceased to be a part of 
the circulating medium ; consequently, of the $150,000,000 of 
legal-tender notes that had been authorized only about 
$100,000,000 were in circulation at the time the secretary of 
the treasury favored another issue. Furthermore, as only one- 
half of the new issue was to be put into circulation, and the 
other half reserved, as previously .explained, the actual increase 
to the circulation would be $75,000,000. 

The strongest reason advanced for issuipg these notes was 
that the banks were absorbing them and pushing their own 
into circulation. Mr. Hooper said, during the debate, "It 
may well be considered whether any restriction of the govern- 
ment issues will not serve to encourage and increase the 
issues of the banks. I confess that I can see no limit to a 
depreciation of the currency that may be produced I^y the 
banks ; and were it not that I have great faith in the prudence 
and wisdom and patriotism of those who manage the banks, I 
should have great apprehension in regard to it, as no obligation 
is now recognized by them to redeem their circulation, many 
of the States having legalized the suspension of specie pay- 
ments." 

The opinion that the banks were a sharp competitor of the 
government in furnishing a monetary circulation, and in 
absorbing the legal-tender notes, became general. The feeling 
grew that they ought to be restrained. A member of Con- 
gress doubtless expressed the sentiments of many others, when 
he arraigned the banks in the following manner: "They 
have authority to buy up our bonds in the market, to take up 
our circulation and put their circulation in the place of it, and 
that is what they are doing all the time ; and the question is 
whether Ave shall pay these people six per cent upon our bonds 



80 FINANCIAL HISTORY OF THE UNITED STATES. [1802. 

for furnishing no better currency than we can furnish our- 
selves. In a contest of this kind I am in favor of the gov- 
ernment. Now, what do these capitalists do ? As soon as a 
five-dollar treasury-note gets into the market, they grab it up 
and put one of their own five-dollar notes into circulation in 
its place, and then convert their treasury-notes into six-per- 
cent bonds. That is the process which is going on all the 
time ; and in that way the banks keep their own paper in cir- 
culation, and keep the paper of the United States out of cir- 
culation. In other words, it is a struggle on the part of the 
banking institutions of the country to bleed the government 
of the United States to the tune of six per cent on every dol- 
lar which it is necessary for the government to use in carry- 
ing on this struggle for our independence and our life." 
Senator Sherman shared the same opinion, though expressing 
it in a milder form. The legal-tender notes " are actually 
kept out of circulation by the depreciated bank paper of the 
country ; and every issue you make increases that tendency. 
Every new issue of treasury-notes is only a bid for new 
inflation by the banks, and thus the better money of the 
United States is hoarded and laid away ; and the paper money 
which is issued on the credit of it is thrown on the country, 
producing inflation and derangement of our monetary system, 
and, I believe, in the end will produce disaster." 

The absorption by the banks of the government circulation 
was magnified a thousand fold. It furnished a very good 
reason for issuing more, while it intensified the feeling against 
the banks. Although they had loaned the government more 
than half their capital at a time when others would lend 
nothing, this Avas speedily forgotten ; and the feeling of 
hostility to them was rapidly intensifying. 



1803.] MORE LEGAL-TENDER NOTES. 81 

No one had a deeper insight into the evil consequences of 
issuing more legal-tender notes than Senator Chandler of 
Alichigan, or discussed the subject with greater ability. On 
the 17th of June he introduced a resolution "that the amount 
of legal-tender treasury-notes already authorized by law shall 
never be increased." The next day he addressed the Senate 
on this resolution. He said that he believed $100,000,000 of 
treasury-notes were suiEcient to furnish a circulation for the 
country, though he voted for the first legal-tender law. The 
enactment had " proved highly satisfactory, not only to the 
secretary of the treasury but to the nation at large." The 
average bank circulation throughout the United States was 
not quite thirty days, but the entire bank circulation did not 
quite average that period. In the agricultural districts it 
averaged more ; in the large moneyed centers much less. The 
government could expect but very little more circulation for 
its issues than the banks could for theirs. Thus it would 
be seen that if the circulation of the $150,000,000 of 
legal tenders averaged thirty days that amount would 
perform the work of $1,800,000,000 per annum, and no 
one pretended that we should require one-third of that 
amount. 

" The moment you authorize the issue of $300,000,000 to 
be used, to be sure, at the discretion of the secretary, the fear 
that it may be thrust upon the banks and bankers of the land, 
creates at once a panic; it creates a surplus of circulation, it 
creates a fear, a dread, a distrust ; and your notes will depre- 
ciate. The moment you reduce the value of these notes, even 
to the point at which they now stand, even to seven per cent 
discount, you drive out of circulation the coin of the country. 
The temptation is too strong to be resisted, to use something 

6 



82 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

else besides coin for change and for small circulation." These 
deductions, the unquestioned teachings of experience, were 
not heeded by Congress. The stream of circulation was 
already full, and a slight addition would surely cause an over- 
flow. Yet Congress, with but little thought, hastily passed the 
bill which was to produce so much disaster. 

The secretary of the treasury was desirous of obtaining 
authority to issue notes of lower denominations than five 
dollars, but the Committee of Ways and Means differed from 
him in this regard. An amendment was offered to the bill 
reported by the committee, granting authority to issue smaller 
notes to the amount of $50,000,000, and this was carried. 
The bill, like the former one, contained a provision for 
converting the notes into bonds, and Mr. Colfax maintained 
that these ought to run absolutely for twenty years instead 
of reserving to the government the right to redeem them 
after five years. The bonds redeemable in 1881, having a 
fixed life of twenty years, were selling at that time in Xew 
York at six per cent above par for greenbacks, while the 
five-twenty bonds would bring no such premium. If they 
commanded a premium, it was maintained that the legal 
tenders would be converted into bonds rapidly, and a mar- 
gin of six per cent between the notes and gold would not 
exist. 

The law provided among other things that any notes issued 
under it might be paid in coin, " instead of being received in 
exchange for certificates of deposit at the direction of the 
secretary of the treasury," and that he might exchange for 
the notes, on such terms as were most beneficial to the public 
interest, bonds bearing six per cent interest, and redeemable 
after five, and payable in twenty years. He was granted 



1868.] MORE LEGAL-TENDER NOTES. 83 

authority to re-issue the notes thus received in exchange, and 
receive and cancel notes previously issued, and in lieu of them 
issue an equal amount by the new law ; he could also purchase 
at rates not exceeding one-eighth of one per centum bonds or 
certificates of debt.* With much labor, therefore, a winding- 
sheet was put around the nation for the purpose of convincing 
the people that national life was extinct. Was ever in 
financial history a more mournful scene than that now beheld 
at Washington, where Congress was trying to destroy the 
national credit in order to furnish an excuse for issuing paper 
money, honestly believing that by this bold and extraordinary 
jugglery the Union might be saved. 

Shortly after enacting this law the use of postage stamps 
was legalized in making payments to the government not 
exceeding ten dollars," in consequence of the sudden and 
general scarcity of small change. After the suspension of 
specie payments the minor silver currency quickly disap- 
peared. The people were not prepared for its sudden flight, 
and for several months were without an effective substitute. 
In the interval those having many small payments to, make, 
especially persons engaged in retail trade, railroad com- 
panies, and the like, suffered much inconvenience. Corpora- 
tions, individuals, and firms began to issue " shinplasters," as 
they were called, to supply the deficiency, and in many cases 
made them exchangeable for commodities and also for bank 
and treasury-notes. To remedy the embarrassment some- 
what, cities and towns issued small notes payable in taxes 
or lawful money. Unless the government should prevent 
this circulation it was evident that the country would be 

'Act, July 11, 18G2, 37 Cong., second session, chap. 142. 

» Ibid., July 17, chap. 19C. 



84 FINANCIAL HISTORY OP THE UNITED STATES. [1863. 

flooded with a varied fractional currency having very little 
value, and causing no little vexation and loss in the trans- 
action of business. The law authorizing the use of postage 
stamps, also provided that after the first day of August, 1862, 
no private corporation, banking association, firm or indi- 
vidual should issue any note, check, token, or other obliga- 
tion for less than one dollar, which was " intended to 
circulate as money or to be received or used in lieu of lawful 
money." 

The use of stamps was not popular. Accordingly, Secre- 
tary Chase recommended that fractional currency be author- 
ized as a substitute. Heeding the recommendation. Congress 
enacted a law ' which authorized the secretary to issue 
fractional currency to an amount not exceeding $50,000,000, 
and redeemable in United-States notes in sums not less than 
three dollars, and receivable for postage and revenue stamps, 
and also in payment of dues to the United States less than 
five dollars, except duties on imports. It was not a legal 
tender for private debts, but it served a useful purpose, was 
convenient, and had the eifect of freeing the country from 
other kinds of small money. About $30,000,000 were kept 
in circulation yearly, which bore no interest and was there- 
fore economical for the government. This was finally replaced 
by silver in 1876.^ The amount issued, including reissues, 
was $368,720,079.21. A very large amount has not been 
redeemed, and is doubtless lost. The secretary has written 
$8,375,934 off the treasury books, and for the last three years 
less than one hundred and twenty-five thousand dollars have 
been redeemed. Not much more, it can be predicted, wiU ever 

' Act, March 3, 37 Cong., second session, chap. 73, sec. 4. 
» Bes., July 22, 44 Cong., first session. No. 17. 



1863.] MORE LEGAL-TENDER NOTES. 85 

be presented for redemption.' Of course, this saving effected 
by the government has been lost by the people. It represents 
in the aggregate a large sum, though the loss is distributed so 
widely that no one has ever suffered in consequence. 

Thus two issues of legal-tender notes, of $150,000,000 
each, had been authorized, beside endowing $60,000,000 more 
of other notes with the same quality. A fractional currency 
had been authorized, and postage stamps also, for making 
payments. We are far, however, from the end of the chapter. 
When a nation has once drank from the paper-money foun- 
tain, it is sure to return. Like the lotus-eater, the effects 
are so bewitching that he longs for more and is never satis- 
fied. When the second legal-tender bill was discussed by 
Congress, the prophecy was repeated that further issues would 
be wanted, and, unhappily, the prophecy was fulfilled. 

The next issue, which was for paying the soldiers, was 
authorized in January, 1863.^ The amount was one hundred 
millions, which was increased to $1 50,000,000 two months 
afterward.' The facts pertaining to this issue will be de- 
scribed in the next chapter, as they are more closely blended 
with the subject there considered. 

' The amounts redeemed annually since the issue ceased in 1876 are — 
Tear. Amount. 



1877 114,043,458 05 

1878 3,855,368 57 

1879 705,158 66 

1880 251,717 41 



Year. Amount. 

1881 $109,001 05 

1882 58,705 55 

1883 46,556 96 

1884 20,629 50 

The United-States treasurer, in his report for 1884, said that the amount 

carried to the public-debt statement would prove " to be far below the 
actual loss or destruction." 
' Ees., Jan. 17, 1863, 37 Cong., third session, No. 9. 
' Act, March 3, chap. 73, sessions two and three. 



86 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

Whatever may have been the feelings of others concerning 
the sudden outilow of so much paper money, Mr. Chase was 
not alarmed. He remarked, that in former reports he had 
stated his convictions and the grounds of them respecting 
the necessity and the utility of putting a large part of the 
debt into United-States notes, without interest, and adapted 
to circulation as money. "These convictions," he added, 
" remain unchanged, and seem now to be shared by the 
people." But he did not repeat the statement also contained 
in a former report, namely, that "no more certainly fatal 
expedient for impoverishing the masses and discrediting the 
government of any country can well be devised [than] an 
irredeemable paper currency "• — such an one in truth as now 
cii'culated among the people. With a spirit of evident satis- 
faction, he continued, " for the first time in our history has a 
real approach to an uniform currency been made ; and the 
benefits of it, though still far from the best attainable con- 
dition, are felt by all. The circulation has been distributed 
throughout the country, and is everywhere acceptable." 



1868.] PERMAXEXT AND TEMPORARY LOANS. 87 



CHAPTER VI. 

PEEMANEXT AND TEMPOKAEY LOANS. 
JANUAEY, 1862, TO JULY, 1864. 

In his first annual report, Mr. Chase recommended the 
establishing of a national banking system, the issue of demand 
treasury-notes, the borrowing of money and an increase of 
taxation. Congress authorized the issue of $300,000,000 of 
legal-tender notes and §500,000,000 of bonds, redeemable at 
the pleasure of the government after five years, and payable 
twenty years from date. They were to bear six per cent 
interest, payable semi-annually, and the secretary could sell 
them " at any time, at the market value thereof for the coin 
of the United States," or for any treasury-notes that had been 
or would be issued. These bonds could not be taxed by State 
authoritv, and the interest was payable in coin. They were 
afterward designated five-twenties.^ Congress also authorized 

'Act, Feb. 25, 1862, 37 Cong., second session, chap. 33. Tlie 5th section 
of the Act provided " that all duties on imported goods shall be paid in 
coin, or in notes payable on demand heretofore authorized to be issued 
and by law receivable in payment of public dues, and the coin so paid 
shall be set apart as a special fund, and shall be applied as follows : First. 
To the payment in coin of the interest on the bonds and notes of the 
United States. Second. To the purchase or payment of one per centum of 
the entire debt of the United States, to he made within each fiscal year 
after the first day of July, 18G2, which is to be set apart as a sinking fund, 
and the interest of which shall in like manner be applied to the purchase 



88 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

individuals or corporations to deposit United-States notes 
with tlie assistant treasurers or designated depositaries for 
thirty days or longer, on which they were to receive the rate 
of five per cent per annum.^ The amount of deposits was 
limited to $25,000,000. Congress also provided for a greatly 
enlarged revenue from taxation. 

After the banks paid the last installment of their loan, the 
secretary was obliged to rely on the feeble income derived 
from taxation, the use of demand-notes authorized at the July 
session of Congress, and the cash from light sales of the seven- 
thirties, until authority had been granted to issue legal tenders. 
Then the legal tenders were put out, and with great rapidity, for 
the expenditures were heavy, and the income from all sources 
was insufficient. For several months after authorizing the 
issue of the five-twenties, their sale was insignificant. Only 
$13,990,600 Mere sold by the close of the fiscal year. That 
part of the financial plan which provided for the borrow- 
ing of deposits was more successful. The bauks of New- 
York City that belonged to the clearing-house deposited 
$20,000,000 of government notes with the assistant treasurer 
very soon after the law was passed,^ and used the certificates 
received from him in settling clearing-house balances. By 
such action the banks loaned permanently $20,000,000 to the 
government, because they were not likely to present these 
certificates for redemption. Funds of some kind must be 
kept for paying clearing-house balances, and the above 
arrangement was very beneficial to the bauks as well as to the 

or payment of the public debt as the secretary of the treasury shall from 
time to time direct. Third. The residue thereof to be paid into the treas- 
ury of the United States." 

' Act, Feb. 25, 1862, 37 Cong., second session, chap. 33, sec. 4. ^ March 7. 



1863.] PERMANENT AND TEMPORARY LOANS. 89 

government. Having thus deposited four-fifths of the amount 
authorized by law, the question was started in the Senate 
whether the lunit of deposits should not be extended to 
$50,000,000. The banks of other cities wished to make 
deposits, and receive certificates which they could use in clear- 
ing-house transactions. The Senate Finance Committee recom- 
mended the increase, but some senators were strongly opposed 
to it. They did not clearly understand the operation of the 
law. They did not perceive that the deposits were in every 
sense a loan to the government, like the deposits of indi- 
viduals to banks which are afterward loaned to others. The 
debate on the question was interesting, particularly as illustra- 
ting the crude ideas which existed in many minds at that time 
on financial matters. The great debates in Congress before 
the war had been over constitutional questions. A new era 
was now begun. Our national legislators had had as little 
experience in finance as our generals in the art of war. Both 
classes learned rapidly, though at fearful cost of treasure, life, 
and happiness. 

Mr. Sherman, as on the preceding occasion, was strongly 
opposed to the receiving of deposits and issuing certificates 
therefor. " The government," he said in the debate, " gets no 
benefit from the arrangement at all." The chairman of the 
Finance Committee thought otherwise. Mr. Sherman, how- 
ever, maintained " that this was the most fiatile idea that could 
enter the mind of any man. At the pleasure of the depositor 
these notes were made to bear five per cent interest. We 
must keep them in the hands of the sub-treasurer to pay the 
certificates of deposit, otherwise we are liable, at any moment, 
to have our government dishonored." He declared, that the 
" practical effect " of the measure would be " to compel Con- 



90 FINANCIAL HISTORY OP THE UNITED STATES. [1863. 

gress hereafter to issue an amount of treasury-notes equal to 
the amount of this deposit." He thought the secretary of the 
treasury " ought to abandon it," that it was of " no benefit to 
anybody except the banliers in New York." Another 
difficulty troubled the senator : If the notes were received and 
paid out, how could the certificates be redeemed if they were 
presented ? He feared that if the amount of deposits was 
increased, more government-notes would be issued in order to 
pay them. 

He was answered by Senator Chandler, of Michigan, who, 
having been a large merchant, and familiar with the banlting 
business, understood the question thoroughly. He said, that 
the operation of the law was " simply to borrow money by 
the government at five per cent, when it was offering 7.3 at 
the same time. What is this proposition ? The bankers 
propose to take, we will say, $50,000,000 of these certificates 
of deposit, beariug five per cent interest. That is no temporary 
loan. You do not keep one dollar on hand in order to pay 
that — not one farthing. It is precisely like the daily opera- 
tions of a bank of deposit. The bank of deposit receives from 
day to day, and pays five per cent interest, but it keeps nothing 
on hand, because it relies upon the receipts of to-morrow to 
meet the obligations of to-day. This is precisely the same 
thing. . . You propose to pay 7.3 per cent interest ; you are 
urging the holders of the notes to come and accept 7.3-per- 
cent bonds, and now the bankers say, ' If you will give us this 
kind of security, which we can use in our daily business, 
we Avill loan it to you at five per cent.' You are gaining just 
so much, not losing anything. The notes tliat are paid in to- 
day, you pay out to-morrow. It is an absolute loan to the 
government, and amounts to a permanent loan to them at five 



1863.] PERMANENT AND TEMPOnAEY LOANS. 91 

per cent." The senator favored an extension of the limit to 
$100,000,000.1 

The limit was extended to $50,000,000, and in June of the 
same year the Committee of Ways and Means recommended 
an increase of as much more. The committee, though opposed 
to the plan in the beginning, frankly stated that thus far it 
had " worked very well in practice." Mr. Hooper added, 
that "it had proved advantageous to the community, as well 
as to the government, though it had delayed the conversion of 
the government-notes." To render the redemption of the 
certificates of deposits more certain, one-third of the second 
$150,000,000 issue of demand-notes was "reserved for the 
purpose of securing prompt payment of such deposits when 
demanded." They were to be issued and used whenever, in 
the judgment of the secretary of the treasury, they might be 
needed for that purpose.^ 

' In June, 1864, the limit was extended to ^150,000,000, and the secretary 
of the treasury was authorized to pay six per cent interest. In some cases 
he did not pay over four, as there was no authority prescribing a minimum 
rate. Tlie deposits loaned to the government amounted to $716,099,247.16, 
and the largest amount at any time was on the 12th of June, 1866. The 
figures at that date were |149,500,000, or within half a million of the 
amount which could be legally received. 

^ Mr. Sherman stated that Mr. Chandler did not seem to understand the 
difference between a loan and a deposit — a deposit which may be called for 
at any moment, and a loan which cannot be called for two or three years, 
or longer period. Mr. Chandler replied : " It is absurd to talk about 
keeping your notes on hand, to be ready to pay these certificates. How 
could a bank pay five, three, or one per cent interest, if it had to keep on 
hand the identical sum deposited, to meet the deposit on which it is paying 
interest. I know, as a banker and as a merchant, that no banker or mer- 
chant in the habit of receiving deposits on call, keeps scarcely a moiety of 
the amount on hand to meet that call. He receives to-day on deposit, at 



92 FINANCIAL HISTORY OF THE UNITED STATES. [18G8. 

This limit was soon reached, and even exceeded before the 
flow could be checked. The wisdom of accepting these 
deposits and issuing certificates for them, was vindicated when 
a stringency happened in the New-York money-market, near 
the close of 1862. Over fifty millions of the deposits were 
quickly demanded and paid, thereby relieving the monetary 
pressure.^ Notwithstanding the large amount withdrawn, 
only oue-fiflh of the fifty million reserve fund was used. 

Another form of temporary loans consisted of certificates of 
indebtedness, which were issued to creditors who were willing 
to accept them, " in satisfaction of audited and settled claims 
against the United States, for debts not less than one thousand 
dollars."' They were-payable a year from date, and bore six 
per cent interest. The bill authorizing their issue was intro- 
duced into the House by the Committee of M'^ays and Means, 
and occasioned no debate. The law was enacted ]\Iarch 1st, 
1862.^ Nor was anything said during the passage of a sub- 
sequent bill providing for the issue of similar certificates to the 
public creditors, who were willing to receive them in payment 
of disbursing officers' checks drawn on the treasurer of the 
United States.' In March, 1863, it was declared that interest 
on them should be payable in lawful money. These certifi- 
cates circulated to a considerable extent, until the accumulation 
of interest was sufficient to induce the holders to retain them 

five per cent, $100,000. He cannot pay five per cent if he keeps that 
$100,000 on hand to meet it ; he cannot pay one per cent ; he cannot pay a 
mill. But he pays the five per cent on call, and he relies upon to-morrow's 
receipts to meet to-day's liability, and to-morrow's receipts meet it. So it 
is with the government. In a thousand and one ways you are in daily 
receipt of enough to meet the daily call upon you for the redemption of 
these certificates." 
' Ann. Treas. Keport, 1863. « Chap. 85. » Ibid., chap. 45. 



1863.] PERMANENT AND TEMPORARY LOANS. 93 

as an investment. The secretary of the treasury issued them 
simultaneously with the legal-tender notes, and continued to 
issue them until the end of the war. 

By means of temporary loans and legal tenders, beside the 
ordinary revenues, Mr. Chase, for a considerable period, satis- 
fied the demands on the treasury department. The expecta- 
tions concerning the sale of bonds were not realized. The 
people took the treasury-notes and parted with them speedily ; 
they invested in a thousand ways, but very timidly in 
government-bonds. For once, that great war legislator, 
Thaddeus Stevens, as full of hope as he was of years, had 
failed in prophecy. In his annual report. Secretary Chase 
said, that two defects inhered in the law authorizing the bonds 
which prevented their sale. One was the provision for sell- 
ing them at their market value, and the other was the privilege 
granted to the holders of the treasury-notes, to exchange them 
for bonds at par. 

" The effect of these provisions was to make negotiations of 
considerable amounts impossible ; for considerable amounts 
are seldom taken, except with a view to resales at a profit, and 
resales at any profit are impossible under the law. Kegotia- 
tions below market value are not allowed, and if not allowed 
the taker of the bonds can expect no advance, unless a market 
value considerably below par shall become established. The 
Act makes advance above i^ar impossible, by authorizing con- 
version of United-States notes into bonds at that rate." He 
therefore recommended the repeal of both provisions.' The 

■ The suspension of the right to convert the legal tenders into honds was 
started by Senator Collamer, of Vermont, in order to make a better market 
for the bonds. Kep. of Com. on Finance, Dec. 17, 1867. Senate No. 4, 40 
Cong., second session, p. 13. The committee in that report recommended its 



94 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

first provision imposed a restriction which Congress did not 
intend, and the second had been followed by the inconveniences 
that were feared, and not by the expected benefits. " Con- 
vertibility by exchange at will is of little or no advantage to 
the holder of the notes, for the clauses which secure their 
receivability for all loans make them practically convertible. 
Whenever the volume of notes reaches a point at M^hich loans 
can be eifected at rates fair to the country and desirable to 
takers, loans will, of course, be made, and ample opportunities 
for conversion offered." 

On these recommendations was founded a bill for a loan 
of $900,000,000, which conferred extraordinary powers on the 
secretary of the treasury, and "which ultimately," as Mr. 
Spaulding truly says, " led to a dangerous expansion of credit 
circulation in various forms, and in connection with the bank- 
bill, which passed about the same time, to an enormous infla- 
tion of prices, caused by the over-issuing of paper money, 
which came very near proving fatal to the finances of the gov- 
ernment and the legitimate business of the country." 

During the discussion of the bill one of the reasons given 
for the small sale of bonds was a lack of currency. This 
reason was founded on the fact that the secretary had not been 
able, without much difficult}', to get legal-tender notes when 
selling bonds and the seven-thirty notes. This fact, how- 
ever, was interpreted very differently by others. " His notes 
did not go in to be funded in the long loans, because they 
were made a legal tender," said a very liigli authority.*- 

restoration. Senator CoUamer was one of the strongest opponents of the legal- 
tender laws, and.jealously regarded the faith of the nation and tlie rights of 
creditors ; yet he strayed a long way from his accustomed path in this matter. 
' James Gallatin, National Finances, p. 4. 



1863.] PEEJIAXEXT AND TEMPORARY LOANS. 95 

Another reason given was because they were neither a long 
nor a short bond, as they were payable after five years if the 
government desired. If the time had been fixed, or the option 
given to the lender, the result would have been different ; so 
it was affirmed. But the secretary believed " that the time 
and rate of the five-twenty loan authorized were judiciously 
determined. . . Xo prudent legislator," he adds, " at a time 
when the gold in the world is increasing by a hundred mil- 
lions a year, and interest must necessarily and soon decline, 
will consent to impose on the labor and business of the jjeople 
a fixed interest of six per cent on a great debt for twenty 
years, unless the necessity is far more urgent than is now 
believed to exist. The country has already witnessed the 
results of such measures in the payment, in 1856, of more 
than four and a half million dollars for the privilege of pay- 
ing a debt of less than $41,000,000 some twelve years, 
averaged time, before it became due." Subsequent events 
proved the wisdom of adhering to the pian of short payments 
and the reserving of the option to pay by the government. 
This was one of the most commendable features in Secretary 
Chase's administration of the treasury. 

Before the bill had passed, the need of money had become 
60 great that more legal-tender notes to the amount of $100,- 
000,000 were issued. Large sums were due to the army and 
navy, and complainings were heard everywhere. The House 
asked the secretary " to furnish the reasons why requisitions 
of paymasters in the army are not promptly filled." "No 
one^' he replied, " can feel a deeper regret than the secretary 
that a single American soldier lacks a single dollar of his pay, 
and no effort of his has been wanting to prevent such a con- 
dition. It is not in his power, however, to arrest the accumu- 



96 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

lation of demands upon the treasury beyond the possibility of 
provision for them under existing legislation. . . . The 
secretary, solicitous to regulate his actions by the spirit as well 
as the letter of the legislation of Congress, did not consider 
himself at liberty to make sales of the five-twenty bonds below 
the market value, and sales except below were impracticable." 

Althou"-h he placed this construction on the law many 
others did not. Congress, notwithstanding a strong desire 
to second the efforts of Mr. Chase, and to sustain him, was 
growing dissatisfied with him. On this occasion, Mr. Gurley, 
of Ohio, whose devotion to the Union was quite as strong as 
that of the secretary, remarked, after this communication had 
been received, that Congress authorized the secretary of the 
treasury to sell the five-twenty bonds at the market value, 
which he had not done as intended by Congress, and the con- 
sequence was that the soldiers and sailors were not paid, as 
they ought to have been. " Of course," he continued, " we 
do not call in question the motives of the secretary, or deny 
his good intentions ; but when the secretary says, in his reply 
to the resolution of the House, that he had no authority, he 
was evidently mistaken in his construction of the law. The 
words, * market value,' do not mean par value, nor at any 
specified time or sum. The market value was the price they 
would bring when offered in the market. There has been no 
business day or week since the law was passed when any of 
the many agents of the secretary in New York could not have 
placed one million, or several millions, in the market, and 
sold them somewhere near par, to raise money to pay the 
army and navy." 

A joint resolution was passed declaring that steps be taken 
immediately by the treasury department to pay the soldiers 



1863.] PERMANENT AND TEMPORARY LOANS. 97 

and sailors, and that a preference should be given to this class 
of creditors. Sixty millions were needed for the purpose. 
The secretary of the treasury was consulted, and he thought 
the legal-tender bill might give temporary relief, but he 
added, in a cormnunication to the Finance Committee of the 
Senate when returning the joint resolution mentioned, "It 
should be regarded, however, only as an expedient for an emer- 
gency. No measure, in my judgment, will meet the necessi- 
ties of the occasion, and prove adequate to the provisions of 
the great sums required for the suppression of the rebellion, 
which does not include a firm support to public credit through 
the establishment of a uniform national circulation, secured 
by bonds of the United States." 

This was his pet measure from the beginning until its 
adoption for raising money to carry on the war. Secretary 
Chase was persistent, and having made up his mind, as he 
said, with reference to issuing legal-tender notes, he did not 
hesitate afterward. But why did he rely so strongly on this 
measure which he knew Congress was reluctant to pass and 
which the banks opposed, and make such feeble efforts to sell 
the five-twenty bonds ? Because, he said, " negotiations below 
market value were not allowed, and if not, the taker of the 
bonds could expect no advance, unless a market value con- 
siderably below par shall become established." Certainly 
this was not the construction which Congress intended. Mr. 
Gurley correctly stated the intention of that body. The 
members intended that the bonds should be sold at their 
" market value." Mr. Chase refused to sell them unless he 
could get par. The consequence was, that selling none, the 
treasury department ran ashore, and |60,000,000 of indebt- 
edness accumulated before any relief could be given. The 



98 FINANCIAL I-IISTOEY OF THE UNITED STATES. [1863. 

soldiers and sailors complained and suffered, the country 
trembled and feared, and the financial ability of the nation 
was terribly shaken. Mr. Chase, however, had the satisfac- 
tion of holding fast to his bonds, however great might be 
his shipwreck of the treasury. Had he sold the bonds as he 
ought, and as Congress expected he would do, the public debt 
would not have accumulated ; by refusing to do this, through 
inability to get as much as he desired for them, he paved the 
way for issuing more greenbacks — a step that he greatly 
deplored. A financier never lived disliking a financial system 
or policy so strongly as Mr. Chase, who, nevertheless, so 
persistently followed it, and who with equal persistence con- 
tinued to take those steps which would compel him to follow 
it. He forced himself into the trap, and was continually 
weaving the web tighter, thus making release more and more 
difficult. A sadder example of financial helplessness has been 
rarely seen. 

The bill authorizing this issue of $100,000,000 of legal- 
tender notes was different from either of the preceding 
measures relating to the subject. Authority was granted by 
a joint resolution, which was first passed by the House, and in 
which the Senate concurred by a vote of thirty-eight to two. 
The secretary was authorized, " if required by the exigencies 
of the public service, to issue on the credit of the United 
States the sum of one hundred millions dollars of United-States 
notes, in such form as he might deem expedient, not bearing 
interest, payable to bearer on demand, and of such denomina- 
tions, not less than one dollar, as he might prescribe, which 
notes thus issued should be lawful money, and a legal tender 
like similar notes previously authorized, in payment of all 
debts, public and private, within the United States, except 



1863.] PERMANENT AND TEMPORARY LOANS. 99 

for duties on imports and interest on the public debt ; and 
the notes so issued should be part of the amount provided for 
in any bill pending for the issue of treasury-notes, or that 
might thereafter be passed by Congress." ^ 

President Lincoln signed the bill, but while doing so 
thought his duty required him to express his sincere regret 
that it had been found necessary to authorize so large an 
additional issue of United-States notes when their circulation 
and that of the suspended banks together had already become 
so redundant as to increase prices beyond real values, thereby 
augmenting the cost of living to the injury of labor and the 
cost of supplies to the injury of the whole country. 

It seemed very plain to the President that continued issues 
of United-States notes, without any check to the issues of 
suspended banks, and without adequate provision for the 
raising of money by loans, and for funding the issues so as 
to keep them within due limits, must soon produce disastrous 
consequences. He favored the adoption of the national bank 
system, and " a reasonable taxation of bank circulation " to 
prevent the deterioration of the paper money of the country. 
But Congress had already made " adequate provision for the 
raising of money by loans ; " the failure to get it was Mr. 
Chase's, who would not execute the law because people would 
not give quite as much for the bonds as he thought they ought. 

Congress should have been warned by the singular miscon- 
struction which the secretary had placed on the law suspend- 
ing the sub-treasury regulations, and on that relating to the 
sale of five-twenty bonds, to frame the laws regulating the 
finances as plainly as possible, granting to him no more 
discretionary power than was absolutely necessary. Never- 
1 Jan. 17, 1863, 37 Cong., third session. No. 9. 



100 FINANCIAL, HISTORY OP THE UNITED STATES. [1863.- 

tkeless, in the clear light of what the secretary had done, and 
realizing, to some extent at least, the greatness of his blunders. 
Congress passed another loan bill, which conferred larger 
authority on the secretary than any previous measure. 

The bill was approved in March, 1863/ and authorized a 
loan of $300,000,000 for the current year, and |600,000,000 
for the succeeding fiscal year. The bonds were to be issued 
for not less than ten, nor for more than forty years, payable 
in coin, and the interest was not to exceed ten per cent. The 
second section of the Act authorized the secretary to issue 
$400,000,000 of treasury-notes, payable within three years, 
bearing no higher interest than six per cent, payable in cur- 
rency at certain periods. They might "be made a legal 
tender to the same extent as United-States notes for their face 
value, excluding interest," if the secretary should think advis- 
able. If issued, they were to be iu lieu of the bonds above 
mentioned. By the third section, legal-tender notes similar to 
those first authorized, " if required by the exigencies of the 
public service for the payment of the army and navy, and 
other creditors of the government," might be issued to the 
amount of $150,000,000. The restriction pertaining to the 
sale of the five-twenties at their market value was repealed. 
The law also provided that "the holders of United-States 
notes issued under former Acts shall present the same for the 
purpose of exchanging them for bonds as therein provided, on 
or before the 1st of July, 1863, and thereafter the right to 
exchange the same shall cease and determine." 

In order, therefore, to expedite the conversion of the notes 
into bonds, Congress, on the recommendation of the secretaiy 
of the treasury, decided to depreciate them by restricting their 

'Chap. Y3. 



1863.] PERMANENT AND TEMPORAEY LOANS. 101 

use. This was truly extraordinary financing. If the govern- 
ment had wished to get the notes to redeem them^ the action 
of Congress would have been rational, but as the notes were 
to be paid out as soon as received, what policy could have 
been worse and shorter-sighted than that of depreciating them, 
and so disabling the power of the government to make pur- 
chases"? If Mr. Chase supposed he had discovered how to 
smite the rock and turn the notes into the treasury, he paid 
very dearly for the discovery when he endeavored to use 
them in paying creditors. The far wiser policy would have 
been to sell the bonds for whatever purchasers would pay. 
In truth, the policy adopted was a subterfuge to cover up the 
declining faith of the government. 

This law was quite unlike the bill submitted by the secre- 
tary of the treasury, in compliance with the request of the 
Committee of Ways and Means and afterward rejected by 
them. His bill clothed him with extraordinary power to 
make loans. In a letter accompanying it he said, that " under 
it the secretary would have power to borrow money in any of 
the ordinary forms, or, if exigencies required, to make addi- 
tional issues of United-States notes." While the bill reported 
by the committee was in the lower House, Mr. Hooper offered 
as a substitute the secretary's bill, somewhat modified, and 
embodying ideas derived from several sources, especially from 
James Gallatin of New York, and Messrs. Stevens and Spauld- 
ing of the Ways and Means Committee. The leading feature 
in his bill was to increase the authority of the secretary to 
borrow money. By it he was authorized to borrow $900,- 
000,000, and issue bonds therefor, or three-years' treasury- 
notes, bearing six per cent or less interest, and which were to 
be a legal tender for all debts except duties. Mr. Hooper 



102 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

contended that if the bill of the committee were adopted, in 
which the amount of treasury-notes was limited to $400,000,- 
000, the secretary had not the power to convert them. There 
was danger of a panic or a run on the treasury at some time. 
Knowing that the secretary had not more than one-half of the 
amount necessary for that purpose, every man might try to 
reach the treasury first to get his notes converted. He con- 
tended that the bill would be imperfect, unless containing the 
power to issue an amount of legal-tender notes at least equal 
to the power of conversion which had been given to the notes 
issued on time. 

Several extraordinary propositions were maintained during 
the debate, among which may be mentioned, first, that more 
legal-tender notes were needed to transact the business of the 
country ; and, secondly, that the preferable policy of the gov- 
ernment was to sell its bonds at par, and to inflate the cur- 
rency, if necessary, to effect this end, instead of selling them 
at a lower rate and leaving the volume of currency unchanged. 
In other words, if the currency were made poor enough, the 
receivers would exchange it for bonds. As the government 
could force it into the hands of creditors, they would certainly 
buy bonds with it if these were the best things that could be 
obtained in exchange. The government might, indeed, de- 
base its currency to any extent, and compel creditors to take 
it; but the government could not easily compel persons to 
furnish new supplies. By adopting the policy of depreciating 
the currency in order to induce the receivers to purchase 
bonds, nothing was more certain than an advance on the 
price of whatever they sold to the government in order to 
insure themselves against loss by depreciation. Congress 
entrusted the secretary with the power to dispose of the 



1SC3.] PERMANENT AND TEMPOEAEY LOANS. 103 

bonds at any time, on such terms as he might deem most 
advisable. 

Having been entrusted with unusual authority for borrow- 
ing money, we will proceed to show how he exercised it. 
When the government attempted to sell the seven-thirties in 
the summer of 1861, Jay Cooke rendered himself conspicuous 
by the amount of subscriptions he secured, which was more 
than one-fifth of the whole. His success attracted the atten- 
tion of Mr. Chase, who now employed him as general agent to 
negotiate the bonds. He advertised extensively, and employed 
sub-agents in all the cliief towns and cities in the loyal States. 
He was paid a commission of one-half of one per cent on the 
first ten millions, and three-eighths of one per cent on sub- 
scriptions beyond that amount for selling them. The editors 
of the newspapers and others were enlisted to bring the advan- 
tages and importance of this loan before the people. Mr. 
Cooke's success was great. The loan became very pojjular, 
and was taken by all classes throughout the country. By the 
1st of July, 1863, bonds to the amount of $168,880,220 were 
taken ; three months afterward the amount had swelled to 
$278,511,500, and by the 21st of January following the whole 
sum had been subscribed at par, and the rush was so great at 
the end that nearly $11,000,000 had been subscribed, and tlie 
sum paid therefor, before notice could be given to sub-agents 
that the whole amount authorized had been taken. Congress 
afterward authorized the issuing of this additional amount. 
" This successful funding of five-twenty six-per-cent bonds," 
says Mr. Spaulding, " showed conclusively that it was not 
necessary to inflate the currency any further in order to raise 
the means to satisfactorily prosecute the war. The six-per- 
cent bonds would furnish sufficient inducement for people to 



104 FINANCIAL HISTOEY OF THE UNITED STATES. [1863. 

take them at the rate of from $1,500,000 to $2,000,000 a day, 
which was about the amount required to pay the daily expenses 
of the government. It looked as if the limit of paper-money 
expansion had been reached ; that the greenback currency 
would not further depreciate below the standard of gold ; and 
that the price of commodities would not continue to advance." 
The flood-tide probably would have risen no higher had not 
a very extraordinary finance minister, especially for such a time 
in our history, been at the head of the treasury department. 

\yhen the last of these bonds were sold in 1864, the sec- 
retary ought to have put the ten-forties on the market and 
offered the same rate of interest. If he had, they would have 
been eagerly taken, for they ran ten years instead of five 
before the government could redeem them, and were therefore 
a better bond for the people to buy. Had he done so, all the 
money needed would have been easily obtained. Instead of 
pursuing this obvious policy. Secretary Chase, without taking 
advice, and contrary to the opinion of the wisest men of the 
time, boldly determined to try an experiment. Though he 
had now been at the head of the treasury department more 
than two years, he had learned but little, and was just as 
unwilling as ever to listen to an adviser. He had not yet 
found out that in times of great public trial, financial experi- 
ments, as far as possible, ought to be carefully avoided. 
During the war of the Revolution, the leaders were obliged to 
resort to every device to raise money, but when they found a 
good way for raising some they did not foolishly abandon 
it for another. Capital is always shy, never more so than 
when things are unsettled, and Mi: Chase ought not to have 
experimented with the lenders of capital at such a time if any 
other course were open to him. He now proposed to do a 



1864.] PERMANENT AND TEMPORARY LOANS. 105 

brilliant tiling, though warned not to attempt it. He de- 
termined that the ten-forty bonds should be issued, bearing 
five per cent interest. What was the consequence ? Bond- 
buying suddenly stopped. Nobody wanted them at that 
price. Only $73,337,750 were taken between the 21st of 
January, 1864, and the Ist of July following, when the sec- 
retary retired from his management of the treasury. This 
amount was taken mostly by banks, as a foundation for the 
national banks which were now organizing. After trying 
the market for a short time, and discovering his mistake, the 
secretary ought to have acknowledged it, raised the rate of 
interest, and sales would have been revived. Mr. Chase, 
unwilling to acknowledge his mistake, resorted to an exceed- 
ingly costly device to cover his great blunder. This device 
consisted in diluting the currency to such a degree that the 
people would take the bonds. Undoubtedly, if a doctor has a 
patient who at first is not sick enough to take medicine because 
the taste is disagreeable, he can be made sufficiently sick to 
take the most distasteful medicine just as quickly as he would 
the nectar of the gods. Secretary Chase proposed to dose the 
people with legal-tender notes until they would readily take 
his ten-forty bonds at five per cent interest. None are so 
bold on such occasions as those who have no comprehension 
of the probable or inevitable consequences of their action. His 
daring was that of a child who moves in joyous ignorance 
amid great peril. 

Accordingly, the policy of further inflation was begun. 
That we have not in the least misinterpreted Secretary Chase's 
intention is clearly shown by the following extract from a 
letter, written by Mr. Spaulding on the 11th of April, 
1864, to a banking house in New York: "It has been 



106 FINANCIAL HISTOEY OF THE UNITED STATES. [1864. 

supposed that by this policy of inflation a five-per-cent ten- 
forty bond might be floated nominally at par. Fundmg the 
present excessive floating debt at five per cent interest is better 
than not to be funded at all, and I hope that the bonds now 
offered at five per cent may be taken up rapidly, and that the 
evils of the present inflation may be removed ; but I fear the 
conversions will not be rapid enough at this rate of interest. 
The bonds do not seem to be readily taken as yet by the 
people. It required the printing and paying out of S400,- 
000,000 of greenbacks before the five-twenty six-per-cent 
bonds could be floated easily at par, and it will probably 
require the circulating paper issues of the government, now 
amounting to about $625,000,000, to be increased to §650,- 
000,000 or $700,000,000 before the people will be induced to 
take five-per-cent bonds, in order to get rid of the surplus 
circulation that may accumulate in their hands, that cannot be 
more profitably invested in other modes." 

This mode of capturing investors by debasing the currency, 
though delusive, was shared by many persons. Mr. Spauld- 
iug seems to have beeu pretty badly infected with it, and 
even Mr. Chase's successor in the treasury department did 
not wholly escape. If a person is acquiring wealth, various 
considerations enter his mind concerning it. If he is getting 
houses, lands, and the like, he may ask himself shall they be 
permanently retained or exchanged for other wealth? Mr. 
Chase and Mr. Spaulding, and others seemed to think that if 
money were made plentiful, the possessors would exchange it 
for government-bonds. Such a conversion was not sure to 
follow. They would unquestionably exchange it for other 
kinds of wealth ; and this was done. A great variety of 
exchanges were made. Persons indulged in wonderful extra- 



1864.] PEEMAXEXT AND TEMPOEAEY LOANS. 107 

vagance iu dress, iu living, in houses ; they enlarged their 
factories ; they did a thousand things with their money. 
Some of them bought government-bonds, but the purchases 
or investments of this nature, even when largest, were very 
small compared with the purchases of other things, and of 
which the people might have deprived themselves had they 
chosen and wished to invest in the government securities. 
The issue of paper money led many to distrust the govern- 
ment and to hesitate in buying its bonds. If there had been 
nothing beside public securities for them to purchase, then 
the bonds would have been sold; the owners of wealth, 
however, could do numberless things with their accumu- 
lations. And in truth they did. The theory of watering 
the circulation in order to quicken investments in bonds was 
a fallacy of the gravest magnitude, but one, unfortunately, 
which many persons cherished. The wider the departure of 
the government from sound principles in issuing money, the 
greater was the distrust of thinking men, including a very 
large class of investors, and the less inclined were they to 
buy government obligations. They preferred to speculate, to 
buy railroad-bonds and stocks, real estate, mortgages, to build 
houses, factories, and the like. 

If the secretary had continued to offer the six-per-cent 
bonds for sale, the tendency of this policy would have been 
to repress inflation, prevent speculation in stocks, gold, and 
other commodities, and by thus holding a steady money 
market, to encourage productive industry and other legiti- 
mate pursuits. On the other hand, by exercising the power 
conferred to issue a large amount of legal-tender and treasury- 
notes, the currency could not escape deterioration to such an 
extent as to embarrass legitimate business, to increase the 



108 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

price of labor, the cost of living, transportation, and the raw 
materials used in building, manufacturing, and other industrial 
operations. 

Very different, therefore, were the effects flowing from the 
two policies. Secretary Chase chose the latter. He sinned 
against the light. The consequences were those which had 
been prophesied. Said Mr. Spaulding, in a letter written in 
April, 1864, " It seems to me that the policy of the treasury 
department for the last three months has been that of infla- 
tion, and over-issues of a paper circulating medium. It has, 
by such a policy, unintentionally stimulated and encouraged 
speculations in gold, stocks, and other things, rather than to 
encourage industry, the production of commodities, and other 
legitimate business. Under this policy, gold has advanced 
twenty per cent, and the price of labor and commodities con- 
tinues to increase to such an extent as to render it very 
embarrassing for business men to carry on their ordinary 
pursuits. I know very well that these evils cannot be fully 
guarded against during the prosecution of such a gigantic war, 
and the large amount of paper necessarily issued by the 
government ; but it is the duty of the government that these 
evils should be mitigated and rendered as light as possible." 

Secretary Chase, therefore, proposed to float his bonds at a 
fearful cost to the country, evidently supposing that it was 
better for him to do this than to acknowledge his mistake and 
seek to repair it. He cannot be excused for this awful 
blunder on the ground of blindness. He must have seen 
what he \vas doing, and traced the demoralization around him 
to its rightful sources. Others saw ; we do not believe that 
he alone could not see. 

The one per cent which he proposed to save would have 



1864.] PERMANENT AND TEMPOEAKY LOANS. 109 

been on the whole amount of bonds $9,000,000 a year, and 
for the ten years before they could be redeemed, $90,000,000. 
This was a large sum, and worth saving, if it could be done 
without jeopardizing the credit of the government. But the 
experiment was too hazardous to try at such a time. When 
the secretary found out that the people did not like five-per- 
cent interest-bearing bonds, he should have advanced the rate 
at once, instead of issuing legal-tender notes, and thus adding 
to the fires of speculation and demoralization which had been 
kindled by the excessive issues of paper money. As soon as 
Senator Fessenden succeeded Mr. Chase, the 1st of July, 
1864, he withdrew the loan and issued new bonds, bearing six 
per cent interest. 

The abrogation of the right to exchange the legal-tender 
notes for bonds, by the law authorizing the nine hundred 
million loan, was regarded by many as a breach of public 
faith. " It was clearly so," remarked Senator Sherman, sev- 
eral years afterward, " unless we regard it as simply a limita- 
tion of the time within which the right to convert should be 
exercised." ^ 

So long as the government was borrowing money by issuing 
bonds, no rights of exchange were impaired, and no public 
injury was sustained in consequence of changing the law, be- 
cause, if the people wanted bonds, they could at any time get 
them. The provision was unimportant until after the gov- 
ernment ceased to borrow, when exchanges could no longer 
be effected. Secretary Chase did not look forward to that 

1 Speeches, p. 245. " It was inserted in the Senate with grave doubts, 
and the error was, that it was not so framed as to be a mere temporary 
suspension of a right, and not a permanent denial ; a stay law, and not an 
absolute repudiation under pretence of a short act of limitation." 



110 riNAJs^CIAL HISTORY Or THE UNITED STATES. [1864. 

time. He was thinking of the present, how to raise money in 
tlie easiest way to carry on the war. If the provision had 
not been repealed, after the war closed, it would have been 
most effective in restoring a sound money standard to the 
country. 

"If the right to fund the greenbacks into the six-per-cent 
gold- bonds had not been abrogated, no financier or practical 
business man, whose opinion is worth quoting, can doubt that 
we would have gone to specie payment within two or three 
years after the close of the war, in spite of ourselves. The 
individual indebtedness at the close of the war, in 1866, was 
small. Every one was comparatively free from debt. The 
six-per-cent gold-bonds were sought for as an investment. 
They soon appreciated to par in gold, and if the right to fund 
had been continued, the greenback currency would have 
appreciated to par in gold, along with bonds. The legal- 
tender Act would have served its purpose as a war measure, 
and we would have returned to the specie standard, mthout 
material detriment to the legitimate business of the country." 

The cost of repealing this provision, therefore, is measured 
by what the country suffered during the period between the 
resumption of specie payments, in 1879, and when they would 
have been resumed, had the law been left to operate. Con- 
gress had legislated far more wisely than they knew, and pre- 
pared a way for the people to resume themselves without 
legislative action. No measure for resuming specie payments 
possessing higher merit was ever devised. In a thoughtless 
hour it was repealed. Congress, though, wlien doing this, did 
not realize the potency of the measure for restoring the specie 
standard of payment. All were thinking of the anxious 
present, and leaving the future for others. No one supposed 



1864.] PERMANENT AND TEMPORARY LOANS. HI 

that the suspension of specie payments would continue long 
after the war was over, and if Congress had possessed enough 
prescience to see how effectively this law could be used to re- 
store them, doubtless it would have been retained, notwith- 
standing the present evils caused by it. In that event, the 
people would have worked out their own financial salvation in 
a short time, and those terrible years of speculation, unprofit- 
able enterprise, unparalleled extravagance in living, general 
abuse of credit, idleness and widespread demoralization, would 
have been unknown. Many of the horrors of war would 
have faded quickly on the return of the sunlight of prosperity. 
It was much easier for Mr. Chase to dilute the currency than 
for his successors to restore it to its original condition. In a 
few months the secretary had accomplished his purpose, but 
fifteen years were spent in making the currency buoyant 
enough to float among the specie-using nations of the world. 
Another evil flowing from the secretary's abortive effort to 
issue five-per-cent bonds, was the changing of the standard of 
value for measuring the legal-tender notes, and thereby un- 
settling prices, and paving the way for all the evil consequences 
which followed. When the legal-teuder notes were first 
issued, they were not merely an irredeemable kind of paper 
money. They could be redeemed in bonds bearing six per 
cent interest, payable in coin within a given period. There 
was, therefore, a fixed standard and measure of value for the 
redemption of the legal-tender notes. Every person who re- 
ceived them, voluntarily or otherwise, knew what he could do 
with them. He could get government-bonds in exchange. 
The redemption of the notes was not on demand, as formerly, 
but after five years, and within twenty, and in the meantime 
the holder received six per cent interest, payable in coin. 



112 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

This was the standard of value fixed by the law. It was, in 
effect, a forced loan from the people to the government, but at 
a fair rate of interest. When the law of March, 1863, was 
enacted, giving the secretary of the treasury power to issue 
bonds, bearing any rate of interest he thought expedient, no 
longer did any standard of value exist fixed by the law. It 
rested with him to say from time to time what the rate of 
interest should be, and to issue and re-issue notes redeemable 
in them. Under such a system it was impossible for any man 
to regulate his contracts or business, with much certainty of 
the future, for no person when he took a legal-tender note 
could fix in his mind its real value. When the rate of 
interest was left to the discretion of the secretary, the value of 
the legal-tender notes was rendered yet more uncertain, and 
this uncertainty was further increased when exchangeability 
into bonds at the will of the holder was removed. 

When the monetary supply from the sale of bonds was 
deficient, Mr. Chase filled the gap, as much as possible, by 
issuing certificates of indebtedness, and also various kinds of 
treasury-notes which had been authorized by the Act of 
I\Iarch 3d, 1863. On the 31st of August,' the pay of the 
troops M'as due, and the secretary wrote to Mr. Cisco,^ the 
assistant treasurer at New York, " The pay of the army for 
the current six months will require an addition to the ordi- 
nary receipts for bonds of about $25,000,000, and must be 
provided for immediately. The best method of doing, so as 
to guard against all contingencies, is to obtain subscriptions 
from the banks and bankers for $50,000,000 of treasury- 
notes, by which name, as you know, legal-tender interest- 
bearing notes are described in the Acts of Congress." 
' 1863. 2 See 18 Bank. Mag., p. 325. 



1864.] PERMANENT AND TEMPOEARY LOANS. 113 

The banks made the loan desired, and the troops were paid. 
When receiving the money the secretary wrote to Mr. Cisco : 
" I hope not to make any additional issues this year at all." 
On the 22d of December, however, the secretary offered $35,- 
000,000 more through Jay Cooke & Co. The banks did not 
get their notes until the middle of January. Half-yearly 
coupons were attached to them at the request of the banks, 
and those for December entitled the holders to two months' 
interest. The notes were issued originally as a legal tender 
for their face value without the interest. The object of the 
secretary was to prevent them from circulating. In the bill 
sent to the House the distinction between the legal-tender 
nature of the principal and interest was made, in order to com- 
pel the holder to keep the notes until they matured or lose 
the interest. When the banks received them, in discharge 
of their loan of $50,000,000, the rates of money in the open 
market had advanced, in consequence of the operations of the 
treasury, to eight or nine per cent. The banks therefore pro- 
ceeded to cut oif the coupons, and hold them for redemption 
and part with the notes. 

To remedy this blunder, the secretary ordered the coupons 
to be cut oif by a government officer. This was a purely 
arbitrary proceeding, and though the banks submitted, the 
circulation of the notes was not stopped, for they were worth 
three or four per cent more to use as currency than to hold as 
an investment. 

When the difficulty of cutting off the June coupons by a 
government officer became apparent, and the requirement was 
so far changed that this could be done in the presence of a 
national bank officer, the banks could collect them after 
making oath of their ownership of the notes to which the 

8 



114 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

coupons were attached. As soon as they were cut off, the 
banks sought to employ the notes as currency.^ By the end 
of that month Mr. Chase had issued $44,520,000 of five- 
per-cent one-year treasury-notes, $108,951,460 of five-per- 
cent two-years' notes, and $15,000,000 of six-per-cent com- 
pound-interest notes.^ The money obtained from these 
sources, together with the issue of more certificates of indebt- 
edness, which at that date amounted to $160,729,000, and 
more certificates of deposit, and the money received from taxes, 
enabled him to meet the obligations of the government. The 
banks had purchased a considerable quantity of bonds, most 
of which were issued under a law passed in March, 1864,' 
authorizing the secretary to make a loan of $200,000,000 for 
that fiscal year, in lieu of the same amount of the previous 
loan, and to issue bonds redeemable after five and Avithin forty 
years, at the pleasure of the government. The interest was 
not to exceed six per cent, and to be paid, as well as the prin- 
cipal, in coin. The banks subscribed for their bonds under 
this Act. They bore, however, only five per cent interest 

' 50 Hunt's Mer. Mag., p. 455. ' See page 124. 

' 38 Cong., first session, chap. 17. 



1864.] ADMINISTEATION OF THE TREASURY. 115 



CHAPTER VII. 

ADMESriSTEATION OF THE TEEASURY. 
JTTIiY, 1864— SEPTEMBER, 1865. 

Mr. Chase retired from the treasury department on the 
last day of the fiscal year 1864. His retirement was first 
known by the Senate when President Lincoln sent in the 
name of David Todd, of Ohio, for secretary of the treasury. 
Gov. Todd declined the appointment, and William P. Fessen- 
den. United States senator from Maine, succeeded to the 
office.^ 

Mr. Chase had served his country at a trying time. That 
he was ignorant of finance when he accepted ofiice was no 
fault ; but his unwillingness to learn cannot be excused. It 
has been said that if he had listened to those who manifested 
even more than an apostolic readiness to exhort and rebuke, 
he would have been overrun with self-appointed teachers, yet 
he might have safely asked counsel of a few and turned a 
deaf ear to others. The bankers in New York and- other 
places were not less deeply moved than Mr. Chase- by the 
events around them, nor less desirous of aiding the pause of 
the Union. Among these he could have found some who 
would have kept him from making mistakes and saved- his 
country from their consequences. Mr. Chase was too self- 
contained, and lacked somewhat of that keen sense of the 

' He was appointed July 1. 



116 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

highest kind of trusteeship, which leads the executor to regard 
his trust more highly than himself. Mr. Chase never lost his 
own personality in an absorbing zeal and disinterestedness for 
the public good. Events were turned to personal use ; he could 
never regard himself simply as a piece of a great machine for 
accomplishing a public end. From the outset, if always sin- 
cerely desirous of promoting the public interests, his eye was 
fixed even more keenly on his own advancement. 

Mr. Chase did not have the openness of mind characteristic 
of a great man. He did not live by ideas like Edmund Burke. 
At one time a large amount of gold had accumulated in the 
custom-house at San Francisco, and the question was asked 
what should be done with it. An official in the treasury 
department replied, " Ship it to London and draw against it." 
Mr. Chase ridiculed the reply. Yet not long afterward the 
gold had disappeared from San Francisco, and when inquiry 
was made concerning- its use, what was learned? The secre- 
tary had quietly given orders to send the gold to London and 
sell it, thus adopting the plan he had ridiculed, but without 
acknowledging his error to the person who proposed it.' Nor 
did he, except on very few occasions, acknowledge his mis- 
takes. Those who walk in the paths of humility are not 
numerous. A great man does not hesitate to acknowledge his 
mistakes, for he is conscious of the security of his position. 
Unskilled in finance, unwilling to learn, and, when going 
astray, persisting in his course, Mr. Chase's failure was inevit- 
able. 

We readily admit that his task was tremendous. He in- 
creased it, though, a thousand-fold, by repelling the confidence 
of those who were eager to support him, and by persisting in 
^ See Ann. Treag. Report, 1864. 



1864.] ADMINISTEATION OF THE TEEASUEY. 117 

a policy at the opening of the war which he was told in plain- 
est language would be suicidal. The suspension of specie 
payments might have been necessary before the war ended. 
Had Mr. Chase, though, adopted the advice of the banks, they 
could and would have largely supplied him with the neces- 
sary funds, and the amount of paper money issued toward the 
close, if at all, would not have been enough to cause that wild 
revolution in prices which followed the early suspension of 
specie payments, with all the accompanying evils of enlarging 
the public debt and the burdens of subsequent debtors. These 
and other consequences we must largely ascribe to the nnwis- 
dom and perversity of Mr. Chase. The blunders of no 
administrator of the treasury department were ever so costly, 
or so patiently borne. 

That he had an ambition to succeed Mr. Lincoln was in no 
wise discreditable. In acting, he moved in the trying light 
of this ambition, and his conduct was not altogether blameless. 
All depended on the ideal within, and the kind of popularity 
and support he sought to gain. Pericles commended himself 
to the best citizens of Athens, and so far as Mr. Chase imitated 
the accomplished Athenian's example, no praise can be too great. 
That he truly meant to do right, and serve his country well, 
we have not the slightest doubt ; that his consuming passion 
to become president led him to pursue a policy which was 
always consistent with the public good may be doubted, if our 
account of his official career be correct. To what extent his 
administration was unfavorably affected by the presidential 
ffever, which raged within him to the end of his days, cannot be 
determined. It has been said that one reason why he so per- 
sistently advocated the establishing of the national banking 
system was because he believed the people would think more 



118 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

frequently and favorably of him as a presidential candidate. 
Statements and inferences of this nature can be more easily 
made than proved, and we would not condemn him too 
severely, for his faults are the inheritance of the race; we 
may mourn because saints and angels do not live amongst us, 
yet we must not censure all the less lovely spirits who are 
dwelling on the earth and occupying high places. Mr. Chase 
had no more ambition than millions of others, and if he was 
washed upon the rocks in trying to grasp the prize, his fate 
was like many before him, and perhaps a countless throng 
who are to follow. If the evil consequences to his country 
from his untoward course were tremendous, let us remember 
this was because of the time in which he happened to serve, 
and that others who have filled the treasury office in a less 
eventful time might, if serving when he did, have blundered 
far worse than himself. 

Mr. Chase would have been obliged to retire from the 
treasury department sooner had not the President feared 
worse consequences from a change. Napoleon's regard for 
scientific men led him to put Laplace at the head of the finan- 
cial department of France ; but as soon as the emperor learned 
that one might excel his contemporaries in mathematics and as- 
tronomy, and yet know nothing about finance, he displaced the 
astronomical financier with another who turned his eyes less 
frequently toward the heavens. Mr. Lincoln moved more 
slowly,: delaying to make the change until long after the gen- 
leral donfidence in Mr. Chase's ability to manage the finances 
successfully had given way. 

Fessenden, who succeeded Mr. Chase, was of a different 
type. He had served efficiently as a member of the Finance 
Committee of the Senate, was familiar with the subsequent 



1864.] ADMI>"ISTEATION OF THE TEEASUEY. 119 

financial operations of the government, and had the complete 
confidence of all. Of the purest private character, devoted to 
his country, not over-confident in his abilities, and desirous 
of knowing more, a better choice probably could not have 
been made. He accepted the office reluctantly, and, though 
serving as secretary only eight months, rescued the treasury 
department from the grave disorder into which his predecessor 
had plunged it. 

When he began his administration on the 1st of July, he 
found, so he said afterward, " his condition peculiarly embar- 
rassing." The cash balance in the treasury was $18,842,558, 
and the unpaid requisitions were $71,814,000. The amount 
of certificates of indebtedness outstanding was $161,796,000. 
The daily expenditures exceeded two millions and a quarter. 
The larger portion of unpaid requisitions was for pay to the 
army, which would be increased over fifty millions on the 1st 
of September. How were these obligations, beside others 
accruing daily, to be met ? From customs he could expect 
no substantial aid, for all the revenue coming from that source 
would be needed to pay interest on the bonds that had been, 
or soon would be, issued. The amount of internal revenue, 
however, had been steadily increasing from month to month, 
reaching nearly $15,000,000 for June. The secretary confi- 
dently hoped for a daily average of three-quarters of a million 
from this source during the succeeding months. "But this 
hope, if realized, would still leave him with a very large defi- 
ciency, to meet which, in part, he might issue certificates of 
indebtedness to public creditors. It was desirable, however, 
to avoid, could other means be found, increasing the amount 
of these securities." He could have recourse to the power 
conferred by an Act passed on the last day of the former fiscal 



120 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

year.i That Act authorized a loan of $400,000,000, for which 
bonds could be issued, redeemable after five or within thirty 
or forty years, as the secretary might determine. They were 
to bear six per cent interest, payable in coin. He could issue, 
however, in lieu of half this amount of bonds, $200,000,000 
in treasury-notes, of any denomination not less than $10, pay- 
able at any time not exceeding three years, or, if thought more 
expedient, redeemable at any time after three years from date, 
and bearing interest not exceeding 7.3 per cent per annum, 
payable in lawful money at maturity, or, at the discretion of 
the secretary, semi-annually. These notes could be sold by 
him on the best terms obtainable, and those made payable 
principal and interest at maturity were to " be a legal tender 
to the same extent as United-States notes for their face value, 
excluding interest." They were to be convertible, at the dis- 
cretion of tlie secretary, into any bonds issued under the Act, 
and might be substituted in lieu of any notes of the govern- 
ment wliich might be redeemed and cancelled. By this Act 
the secretary was also authorized to sell any five- twenty bonds 
remaining unsold, authorized by previous Acts, and to receive 
in payment lawful money, or, at his discretion, tre'asury-notes, 
certificates of indebtedness or certificates of deposit. As 
$62,191,400 of treasury-notes, issued under other Acts, had 
been redeemed and cancelled, these could be replaced in addi- 
tion to the $200,000,000 of treasury-notes just mentioned. 
Finally he had authority under the Act of March 3, 1863, to 
borrow $160,063,220, the remainder of the nine hundred 
million loan. 

The secretary was determined to issue no more legal-tender 
notes if he could obtain means in any other way. " Flushed 
' 38 Cong., first session, chap. 172. 



1864.] ADMINISTRATION OF THE TREASURY. 121 

as the money market was with circulation, sufHciently, at 
least, to meet the necessities of business, he was anxious, if 
possible," to use his own words, " to avoid so doubtful an 
expedient." The prospect of negotiating a loan in the ordi- 
nary way was by no means flattering, as the notice for a loan 
of thirty-three millions advertised on the twenty-fifth day of 
June had been withdrawn on the 2d of July, the secretary 
having reason to believe that such a loan would not be taken, 
on terms which it would be for the interest of the government 
to accept. 

Mr. Fessenden then sought to borrow $50,000,000 of the 
banks in Xew York, Philadelphia, and Boston, on the pledge 
of bonds and notes which he had authority to issue. He met 
the representatives of a large number of banks, yet, notwith- 
standing " a real desire to aid the government," they were not 
able to furnish the assistance required on terms which the 
secretary could accept. The only alternative was, " to issue 
l^al-tender notes to a very large amount, or again advertise 
for a loan." " He had no hesitation," he says, in his annual 
report, "as to which course should be adopted." Accordingly, 
on the 25th of July, he issued proposals for a national loan, 
the lenders to receive treasury-notes payable in three years, 
with semi-annual interest at 7.3 per cent in lawful money. 
" He incurred a considerable expense in advertising this loan, 
believing that it should be as widely diffused and as generally 
understood as possible, and offered liberal inducements to 
stimulate the efforts of corporations and individuals to dispose 
of the notes." His success was not as great as he expected, 
for the reason mainly that other national securities were press- 
ing on the market which were preferred by investors. 

The amount of suspended requisitions had swelled to more 



122 FINAJSrCIAL HISTORY OF THE UNITED STATES. [1864. 

than $130,000,000. A large sum was due to the soldiers, 
who " were suffering from the long delay in satisfying their 
just claims." The secretary was resolved "to use all the 
means at his command to pay at least " this class of cred- 
itors. Many of them, through the paymasters, had expressed 
a wish to receive seven-thirty notes of small denominations in 
payment. They were taken to a large amount, the soldiers in 
many instances also expressing satisfaction because they were 
able to thus aid the country by loaning money to it. The 
amount of notes paid to the soldiers at this time exceeded 
$20,000,000. 

Once more the secretary endeavored to sell bonds. He 
offered those which Secretary Chase had advertised on the 
25th of June, and not finding purchasers at satisfactory prices, 
had withdrawn. The amount was $32,459,700. The public 
were now ready to take them, bids reached nearly $70,000,000, 
and the premium offered was four per cent, and in some cases 
even higher. 

Encouraged by this success, the secretary, on the 1st of 
October, advertised for another loan of $40,000,000 of five- 
twenty bonds, issued under the June Act of 1 864. At that time 
the money market was in a feverish condition, arising from 
violent fluctuations in gold and other causes, and serious 
doubts were entertained whether acceptable offers would be 
made. " Under these circumstances, and with the hope of 
affecting favorably the market price of certificates of indebt- 
edness, which had become somewhat depressed by the large 
amount to which the issue had been necessarily increased, the 
secretary decided to receive one-fourth of the subscription 
in these securities. The result was that bids were received 
amounting to nearly $60,000,000, and the whole amount 



1864.] ADMINISTRATION OF THE TREASURY. 123 

offered was taken at a rate above par, and averaging to the 
government a fraction less than one per centum." 

Although Secretary Fessenden had been successful in rais- 
ing monoy to sustain the government, he was heavily weighted 
with anxiety and trial. The national banks were dissatisfied, 
not with him, but with the law under which they were living. 
It was reported in November that the secretary intended to 
recommend to Congress the payment of custom duties in legal- 
tender notes, for the reason that such a policy would reduce 
both the price of gold and the public expenditures. His 
axinual report was awaited with dreaded impatience, and 
especially an announcement of the issue of more legal-tender 
notes. Many persons feared the results of such a policy. 
They were bold in declaring that the country -would suffer less 
by the sale of bonds at seventy-five cents on the dollar than 
by a greater dilution of the currency, and the raising of the 
price of gold and other commodities. 

The secretary, in his report, declared that it was difficult to 
fix on any policy not subject to the contingencies of the hour. 
It was, in his judgment, not only difficult, but impossible, to 
apply fixed rules to a condition of affairs constantly changing, 
or to meet contingencies which no human wisdom could fore- 
see, by a steady application of general laws, especially in a 
government, and with a people where public opinion was the 
controlling element, and that opinion was not under the direc- 
tion of those who might happen to administer public affairs. 
Mr. Fessenden also maintained that a wide discretion should 
be entrusted to the officer charged with the duty of negotia- 
ting loans, in order that he might be enabled to avoid unex- 
pected difficulties occasioned by possible conditions of the 
money market. This duty must necessarily be entrusted to 



124 FINANCIAL. HISTORY OF THE UNITED STATES. [1864. 

somebody, and the people could have no other reliable security 
for faitlifulness than might be found in the established charac- 
ter of the individual charged with so important a trust, who- 
ever he might be. " The discretion thus confided should, in 
the opinion of the secretary, include the power of increasing 
the currency." He declared that to no individual would any 
considerable addition to the circulation, in any form, be more 
objectionable than to himself, and " no one would resort to 
such a measure, when the circulation was adequate to the 
wants of business, with more reluctance." He did not believe 
that a patriotic people, possessed of ample means, would com- 
pel him to adopt a measure so fraught with injurious conse- 
quences as an issue of paper money beyond the limit thus 
prescribed. It was, however, for the people to determine 
whether the necessary means should be furnished by way of 
loans, and the circulation be restrained within safe limits, or 
A\hether they would prefer to endure the evils of exorbitant 
prices, with a loss of credit in the present, and a debt of 
needless magnitude entailed on the future. 

The people had indeed, within a few months, expanded the 
circulation, by employing as money a large amount of interest- 
bearing treasury-notes issued by the government. When 
authorized. Congress did not suppose they would be used 
to swell the monetary stream. Those issued with coupons 
proved especially objectionable, because they were hoarded 
before the time for paying interest on them, and immediately 
afterward rushed into the market. In consequence of this 
unexpected result, Mr. Fessenden withdrew and destroyed a 
large amount, filling their place with notes payable in three 
years, bearing six per cent interest compounded semi-annually. 
No specific law authorized the issue of such notes. As, how- 



1864.] ADMINISTRATION OF THE TEEASUEY. 125 

ever, the interest at six per cent compounded would be con- 
siderably less than 7.3 annual interest, which the secretary 
was authorized to offer, their issue was lawful. They were 
issued on the belief that the owners would be more likely to 
hold them until maturity as an investment. In his annual 
report, Mr. Fessenden said that he was unable to deter- 
mine what proportion might be considered an addition to 
the circulation. To that extent, whatever it might be, they 
occasioned, and in a greater degree sustained, an increase of 
prices and depressed values. Their circulation continued 
throughout the war in a varying manner, until, in truth, they 
were paid by Mr. McCuUocli.* 

While IVIr. Fessenden was secretary of the treasury, a note- 
worthy recommendation was made concerning the payment of 
interest. As the probable supply of coin would be insufficient 
to pay interest in coin on a much larger amount of securities 
than already existed, he was forced to the conclusion that the 
government in the future must rely, for the most part, on securi- 
ties bearing interest in currency, convertible into others bear- 
ing interest payable in coin. The annual coin interest at that 
time exceeded fifty-six millions. In the secretary's judgment, 
notes bearing an increased rate of interest payable in currency, 
redeemable in three or five years, and convertible at maturity 
into five-twenty bonds, would be preferable to any other form 
of security. Bonds at long date, bearing interest payable in 
currency at the usual rates, would be less attractive, and in 
the end involve a much greater sacrifice. The seven-thirty 
notes authorized by the Act of the previous June presented as 
many advantages as any form of currency security, uniting, 
as they did, a high rate of interest with convertibility. The 
' See McCulloch's letter, dated Oct. 3, 1878, New York Tribune. 



126 FINANCIAL HISTORY OF THE UNITED SirATES. [1864. 

secretary, therefore, made known plainly his intention to issue 
seven-thirty notes, unless Congress provided other ways of 
getting money. 

On the 10th of December, Mr. Fessenden gave notice that 
the treasury department was ready to pay in lawful money, 
or by conversion into bonds, the three-years' treasury-notes 
issued under the law of July, 1861. They were duly con- 
verted into other notes and bonds. No notes of later issue 
became due until after the close of the war. The secretary 
negotiated a twenty-five million loan with the banks of New- 
York City in December, which subjected him to unfavorable 
criticism. It was maintained that the negotiation ought to 
have been public, and all capitalists have had an opportunity 
to make bids. Having been re-elected to the Senate, he 
determined to leave the treasury by the 5th of March, and 
this determination unfavorably affected the latter part of his 
administration. It was felt that his course was less clearly 
determined because of his intention to retire from the treasury 
office. By the issue of seven-thirty notes, the revenue from 
taxes, and the sale of bonds, he was able to meet all pecuniary 
obligations. The revenue from internal sources was now very 
large, and greatly strengthened the credit of the government. 
The people, after three years of doubting, had learned more 
perfectly the measure of their capacity to pay taxes for carry- 
ing on the war. 

On the 3d of March, 1865,* the secretary was authorized 
to borrow $600,000,000, and to issue bonds or interest-bearing 
treasury-notes therefor. He could determine whether to pay 
the interest in coin at the rate of six per cent, or in currency 

' 38 Cong., second session, chap. 77. See Ibid., Act, Jan. 28, 1865, 
chap. 22. 



1865.] ADMINISTRATION OF THE TREASURY. 127 

at 7.3 per cent interest. The bonds were to be redeemable 
after five years, and the treasury-notes were to " be made re- 
deemable or payable at such periods, as in the opinion of the 
secretary of the treasury," might be deemed expedient. 

Hugh ]\IcCulloch, who had previously served as comp- 
troller of the currency, succeeded Mr. Fessenden at the be- 
ginning of President Lincoln's second administration. During 
the month of March, he issued $70,000,000 of three-years' 
treasury-notes, bearing interest paj-able in currency, and con- 
vertible at maturity, if the holders desired, into five-twenty 
bonds. In April, Richmond was captured, and soon after 
the Confederate armies surrendered. The secretary knew that 
these events would be followed by the early disbanding of the 
Union armies, and by heavy requisitions for transportation, 
pay, and bounties. How he raised the money cannot be told 
in a better way than by himself. " As it was important that 
these requisitions should be promptly met, and especially im- 
portant that not a soldier should remain in the service a single 
day for want of means to pay him, the secretary perceived the 
necessity of realizing, as speedily as possible, the amount — 
$530,000,000 — still authorized to be borrowed under the 
March Act of 1 865. The 7.3 notes had proved to be a popular 
loan, and, although a security on longer time and lower interest 
would have been advantageous to the government, the secre- 
tary considered it advisable, under the circumstances, to con- 
tinue to offer these notes to the public, and to avail himself as 
his immediate predecessors had done, of the services of Jay 
Cooke in the sale of them. The result was in the highest 
degree satisfactory. By the admirable skill and energy of the 
agent, and the hearty co-operation of the national banks, these 
notes were distributed in every part of the Northern, and 



128 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

some parts of the Southern States, and placed within the 
reach of every person desiring to invest in them. No loan 
ever offered in the United States, notwithstanding the large 
amount of government securities previously taken by the 
people, was so promptly subscribed for as this. Before the 
1st of August, the entire amount had been taken, and the 
secretary had the unexpected satisfaction of being able, with 
the receipts from the customs and the internal revenue, and a 
small increase of the temporary loan, to meet all the requisi- 
tions." On $230,000,000 of the notes issued, the government 
had the option of paying six per cent interest in coin, instead 
of 7.3 in currency. The secretary reserved this option, 
" because he indulged the hope that, before their maturity, 
specie payments would be restored, and because six per cent in 
coin is as high a rate of interest as the government should 
pay on any of its obligations." 

Our imperiled Union, therefore, had emerged from the 
dreadful contest, not only with increased honor and political 
strength, but with restored national credit. By thus obtaining 
voluntarily from the j^eople more than $500,000,000 in three 
months — an event then unique in the history of national bor- 
rowing — a successful public application had been made for the 
first time, of the familiar personal doctrine, that by spending 
wisely our riches are increased. 

Such, in brief, is a history of the loans authorized and nego- 
tiated for maintaining the government during the war. The 
principal Acts authorizing loans beside the legal-tender 
notes were passed February 25, 1862, which authorized 
$500,000,000 of bonds; the $900,000,000 loan Act of March 
3, 1863; the $200,000,000 loan Act of INIareh 3, 1864; the 
$400,000,000 Act of June 30, 1864, and the $600,000,000 



1865.] ADMINISTRATION OF THE TREASUEY. 129 

Act of iNIarch 3, 1865. There were other Acts, as already 
mentioned; these five, however, contained the authority for 
making the great loans of the war. 

Since the beginning of the special session of Congress, in 
1861, said Mr. McCuUoch, in his first annual report, the most 
important subject which had demanded and received the at- 
tention of Congress, had been that of providing the means to 
prosecute the war ; and the success of the government in rais- 
ing money was evidence of the wisdom of the measures 
devised for that purpose, as well as of the loyalty of the people, 
and the resources of the country. No nation, within the same 
period, had ever borrowed so largely, or with so much facility. 



130 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 



CHAPTER VIII. 

EFFECT OF ISSUING LEGAL-TENDEK NOTES AND SUSPEND- 
ING SPECIE PAYMENTS. 

Having shown how a section of the national-bank bill was 
transformed into a law authorizing the issue of demand treas- 
ury-notes endowed with a legal-tender quality, we shall trace 
the eifects of this legislation on the morals and prosperity of 
the people. Some of these effects were immediate and brief, 
while others are yet felt like the agitation of the sea, which 
continues long after the storm has passed away. 

The suspension of specie payments also produced a series of 
effects which are worth careful study. These, as well as the 
effects of issuing legal-tender notes, will be traced in this 
chapter. 

When the first bill authorizing the issue of legal-tender 
notes was before the House, Mr. Horton, of Ohio, set forth in 
a speech the principal effects which would follow if the notes 
were issued. They would be paid to contractors of the gov- 
ernment, who would pay them to their debtors. They, in 
turn, would be anxious to get persons to take them, and money 
would seem for the time to be abundant and trade active. All 
parties, however, would find out that the government had 
wronged somebody. And what would the contractors do next? 

" They will bide their time. The government is obliged to 
get supplies, and the contractors will put their supplies up to 
the amount they have lost, and ten or fifteen per cent more." 



1863.] EFFECT OF ISSUING LEGAL-TENDER NOTES. 131 

Mr. Horton then described the effects of the Act among the 
people. " The first shock -will be that the moral sense of the 
country -will be outraged. Your friends and neighbors will 
not at first be made to believe that it is right when they have 
agreed to pay a hundred to get a clear receipt for eighty-five, 
or ninety or ninety-five." The next effect, he maintained, 
would be confusion and uncertainty in relation to the value of 
all exchangeable things. Prices, too, would be inflated. 
" There are some things," he remarked, " which cannot be 
done. Inflation of prices, although it might not be rapid, and 
although the country might not be ruined at once, and although 
we might not find ourselves in that Serbonian bog in which 
whole armies have sunk at once, we will get there soon enough. 
And, when inflation of prices begins, exports decrease and 
imports increase. Agricultural interests will be injured to an 
incalculable extent, and the next great result will be upon us, 
which is the export of gold out of the country to pay debts 
abroad for excessive importations, superinduced by the infla- 
tion of prices here. We shall not then be able to say, as we 
can now, ' The farming productions of the West have been sent 
abroad to such an extent that even gold has been brought 
back to pay the balance of trade in our favor.' In the end 
the government will be mostly the loser by the inflation of 
prices, because it has to buy such an immense amount of 
supplies, and the contractor will hold in his hand, not the 
legislative power, but the practical power, to say, here is my 
property, and you shall have it for such a price, and not for 
less." All classes of lal)or, also, he maintained, would be 
injured " by this great act of oppression. You render the 
standard of payment uncertain, and they never will know 
what their wages are for a day's work." The capitalist of 



132 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

New York, the millionaire, here and there, would take care 
of himself and send his means out of the country. But the 
worst effect of all was the disgracing of the government. It 
was worse than " forty defeats on the battle-field. It could 
not be wiped out by any future heroism. It was saying to 
the world that we were bankrupt, and that we were not only 
weak, but not honest." No other member of Congress' 
described the probable effects of the bill during the debate 
with so much prescience. He described, however, only the 
injurious and malign effects, and was unable to foresee any 
good result from the use of this expedient. Nevertheless, 
good was mingled with the evii, and the truth of history 
requires that all the effects should be traced and set forth in 
their proper light. 

The first noteworthy effect of suspending specie payments 
was the increase of bank circulation.^ After the suspension 
of specie payments in 1812 the same thing happened. The 

* Eepreaentative (now Senator) Morrill, of Vermont, stated the effects of 
the measure in the following succinct and forcible language: "I maintain 
that the bill should not pass, because it will infinitely damage the national 
credit ; because it will cut off all other chance of supplies ; because it will 
reduce our standard of legal tender already sufficiently debased ; because it 
will inflate the currency, and increase manifold the cost of the war ; because 
it would slide into the place of proper taxation ; because, as a resource, it 
must ultimately fail, and tend to a premature peace ; because it is a question 
of doubtful constitutionality ; because it is an ex -post facto law, immoral, and 
a breach of the public faith ; because it will at once banish all specie from 
circulation ; because it will dampen the ardor of our men at home, as well 
as soldiers in the field ; because it will degrade us in the estimation of other 
nations ; because it will cripple American labor, and throw at last larger 
wealth into the hands of the rich ; and, — because there is no necessity call- 
ing for such a desperate remedy."— Cojigr. Olobe, Feb. 4, 1862. 

»17 Bank. Mag., pp. 401-416, 481-494, 590. 



1863.1 EFFECT OF ISSUING LEGAL-TENDER NOTES. 133 

banks multiplied rapidly. In 1861, however, they contracted 
their obligations preparatory to resuming specie payments, 
but seeing the treasury continue to issue notes, and becom- 
ing convinced that the suspension would last until the end 
of the M'ar the banks increased their own notes.' Within a 
year after the suspension, the banks in New Hampshire had 
increased their circulation twenty-seven per cent; those in 
Philadelphia, one hundred and thirty-eight per cent ; in Prov- 
idence, eighty-six per cent ; in New York, sixty-nine per 
cent ; in Massachusetts, twenty per cer^t ; in Baltimore, thirty- 
two per cent; in Newark, New Jersey, forty-two per cent, 
while the increase was very large in other States and cities. 

Several reasons were given for increasing their circulation. 
One of the most common of all was, that silver change 
having become scarce, small bank-notes were needed as a sub- 
stitute. Another reason was that, in suspending epecie pay- 
ments, gold was withdrawn from circulation, and more bank- 
notes were needed to fill the vacuum. It was also maintained 
that large sums were carried by soldiers to the seat of war, 
and other sums were left by them to support their families, 
thus diminishing the supply in actual circulation. Moreover, 
at the time when the suspension occurred, cash dealings had 
greatly increased ; the circulation of Eastern banks was 
enlarged by sending it to the West to fill the gap occasioned 
by the failure and closing of Western banking institutions. 
Another reason given by the bank commissioners of Massa- 
chusetts was, that the motive for sending bank-notes for 
redemption no longer existed, especially of those banks having 
good credit, because their notes were as valuable as anything 
which could be obtained for them. "Men hold them and 
1 Amasa Walker, 52 Hunt's Mer. Mag., p. 24. 



134 FINANCIAL HISTORY OF THE UNITED STATES. [1862. 

hoard them, therefore, precisely as they would do with specie, 
and the volume of the currency becomes greater, precisely as 
its current grows more sluggish." ^ 

Many of the banks put forth no unusual or unjustifiable 
effort to enlarge their circulation, and were surprised by 
the event. " They had anticipated a great decline of circula- 
tion as soon as the government-notes should come into use." 

^ Mass. Bank Commissioners' Kep., 1862. After stating that the total cir- 
culation of the banks in Massachusetts had been rapidly increasing, and for 
some months past, and was increasing still, the " commissioners remarked, 
that among other causes of tlie increase was the inconvertibility of paper 
money, the influence of which upon the circulation cannot be overlooked, 
though the force of it can never be accurately measured. So long as bank- 
notes are redeemed in gold upon demand, according to the tenor of the 
promise which they bear upon their face, the homeward current of the 
circulation will always be rapid. Beside, the demand which there 
always is foi' gold for foreign payments, for distant remittances, and 
fur meeting customs duties, there is a perpetual competition going on 
between the banks, each striving to enlarge its own circulation, and to drive 
home that of its rivals. The law of Massachusetts, which prohibits a bank 
from paying out any bills except its own, helps on the competition ; for, the 
moment a bill is deposited in any bank other than that by which it was 
issued, it cannot be again used as currency till it has traveled home, by way 
of State street, and had its convertibility put to the test of actual redemption. 
"When, however, specie payments are suspended, and bills are no longer 
redeemable in gold, a great motive for sending them home is withdrawn. 
The tendency of this stagnant money to depreciate from excess, to enhance 
prices, to stimulate importations, and to drive gold out of the country is too 
well established by experience in this and other countries to be seriously 
questioned. Such a depreciation is now attested by the high price of gold, 
and of all merchandise bought with paper, and it is a calamity calculated 
to excite the greatest solicitude of our people." — See Bank Reports for 
1862, of Maine, New Hampshire, Connecticut, and New York ; also, Annual 
Eeprirl of Secretary of Treasury, on the Coiulilion of the Banks in the United 
States for 18G2. Ex. Doc. No. 20, 38 Cong., first session. 



1862.] EFFECT OF ISSUING LEGAL-TENDER NOTES. 135 

It extended, notwithstauding the eiforts of some banks to 
diminish their notes ; those issued did not come baeli for 
redemption; and, on the otlier hand, fresh supplies were 
wanted by depositors and customers to provide for tax-rolls 
or to make other payments. 

These reasons for expanding bank issues were not enter- 
tained everywhere. A bank officer in Pennsylvania wrote, in 
December, 1862, "the present expansion of the banks is 
unjustifiable." The banks had, for the sake of profit, though 
contrary to prudence, contributed to the expansion. " They 
M'ill continue to expand," he adds, " until the bubble bursts, 
or the iron hand of the government interferes to save the 
people. This ad libitam issue of paper is filling up all the 
channels of circulation, and forcing sj)ecie into the clutches of 
hoarders and the hands of brokers. It is inflating values, 
stimulating stock speculations, will soon give a fictitious \-alue 
to real estate, and will end in a crisis such as we have never 
yet experienced in history." 

There was a conservative bank movement in Boston and 
Xew York after the suspension, but of short duration. In 
Xew York and Pennsylvania the banks dared not enlarge 
their circulation so long as they declined to redeem it/ No 
law existed or could be passed in New York sanctioning the 
suspension of specie payments. When, however, the legal- 
tender law was enacted by Congress, in February, 1862, the 
banks of New York, securely sheltered by it, promptly 
enlarged their circulation.- Two facts, therefore, sharply 
stand out in the history of our paper monetary circulation 

' 16 Bank. Mag., p. 969. The State laws were modified or repealed in 
1862, and then the banks enlarged their circulation. 
' See K. J. Walker's article in Cent. Monthly, Jan., 1862. 



136 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

during the early years of the war : First, that the secretary, 
contrary to the advice of the banks, issued a considerable 
quantity of demand treasury -notes, which swelled the circula- 
tion. They declared, as we have seen, that they could not 
redeem them in addition to their own circulation. As the 
treasury was without coin which could be used for that pur- 
pose, their redemption was impossible, and the banks believed 
they would depreciate. The second fact is, while accusing 
the secretary of the treasury of inflating the currency by issu- 
ing treasury-notes, they were doing the same thing. Not all 
of the banks were guilty of this inconsistency ; but many of 
them swelled their issues, notwithstanding the enormous 
quantity issued by the government, until they were pressed 
into the national banking system. 

When the inflation of prices began in consequence of in- 
creasing the bank circulation and treasury-notes is a question. 
The superintendent of the banking department of New York, 
in his annual report, made at the close of 1862, says : " No 
better barometer whereby to measure the state of the currency 
can be found than the returns made to this department ; and 
these indicate most clearly that as yet no redundancy of the 
currency exists. Indeed, the capability of this department to 
meet the demand for notes was never more severe than it has 
been during the last nine months. Nor was it the result of a 
fictitious demand. The banks found themselves embarrassed 
in the transactions of their business by the want of currency to 
meet the daily requisitions. Every soiled and mutilated note 
capable of service was brought into use, and the banks of the 
East were literally besieged for currency wherewith to move 
the crops of the West. Engagements Mere made M"eeks in ad- 
vance by those wanting currency, in order to secure a supply, 



1863.] EFFECT OF ISSUING LEGAL-TENDEE NOTES. 137 

and numerous facts might be adduced to prove, that with all 
the issues of the government and the banks, the volume of 
currency was not in excess of the wants of the country." 

The secretary of the treasury, in his annual report, in De- 
cember, 1862, maintained that no inflation had yet been 
caused : First, "because the whole quantity of circulation did 
not, at the time, greatly, if at all, exceed the legitimate de- 
mands of payments ; " secondly, "because the whole, or nearly 
so, of the increase in circulation during the year was legiti- 
mately demanded by the changed condition of the country ; " 
and, thirdly, because the premium on gold had fallen seven or 
eight per cent within a month from the date of his report. 
If, however, an "undue expansion had taken place, the obvious 
and sufficient explanation was the increase of bank circulation, 
and deposits." 

That prices had risen to some extent was a familiar fact, 
but what caused the rise ? The enormous demand of the gov- 
ernment for commodities was a powerful cause. How far the 
banks contributed by increasing their notes and deposits, and 
how far the government by issuing legal-tender notes, is a 
question, however important, we cannot stop long to con- 
sider. The effect of an increase of the circulating medium 
on prices is determined by the use made of it, and also by the 
nature of the medium itself An increase of silver in India 
for many years had no effect on prices, because it was hoarded, 
turned into jewelry — in short, was practically demonetized. 
The legal-tender notes were issued by the government to pay 
contractors, soldiers, and other persons engaged in the public 
service. A large portion of these notes found their way to 
the banks and swelled their deposits. The issues of the banks 
were paid to persons needing money to discharge debts, and 



138 FINANCIAL HISTORY OP THE UNITED STATES. [1863. 

circulated very much in the same way as the legal tenders. 
The iucrease in many cases took the form of loans to ordinary 
borrowers. They came back, or a portion of them, for deposit, 
and were re-issued. Both kinds, therefore, circulated among 
the people, both were deposited in the banks and furnished 
the loan supply, and both, therefore, had the same influence 
on prices so far as these were eifected by the quantity of the 
circulating medium. As the banks had issued only f37,- 
000,000 of notes since the first of the year, and the govern- 
ment had issued during the same period $80,000,000 of them, 
the conclusion may be fairly drawn that the government, by 
its action in expanding the monetary circulation, had done 
more to enhance prices than the banks. 

The opinion of the secretary of the treasury, that the banks, 
and not the government, was the cause of raising prices, so 
far as they had been raised by increasing the quantity of 
paper money, was shared by many intelligent and unprejudiced 
persons. No one, however, could reasonably doubt that the 
advance in prices in 1863 was caused chiefly by the enormous 
demand of the government for many things, and by deluging 
the land with paper money.' The unsettling of prices is 
always attended with loss and suffering. Their stability is 
one of the conditions of a true and lasting prosperity ; rapid 
changes mean great gains and losses, and do not often occur 
in a healthy commercial society. In earlier times, prices were 
not infrequently changed by debasing the coinage. The kings 

' " It is said that the excessive bank deposits have as much iniiuenoe in 
creating and sustaining high prices as a superabundant currency. This is 
unquestionably true; but it is also true that excessive deposits are the 
effect of excessive currency, and that whenever the currency is reduced 
there will be, at least, a corresponding if not a greater reduction of de- 
posits." — McCuLLOCH, Ann. Treas. Report, 1865, p. 13. 



1863.] EFFECT OF ISSUING LEGAL-TENDER NOTES, 139 

of France, from the time of Louis VI., asserted the right to 

change the rating of the coins \\-henever they pleased. Philip 

le Bel was so notorious for doing this, that Dante was justified 

in singing of 

* * * the woe that he shall pour 
Along the Seine, by uttering coin debased. 

During tlie disastrous reign of John, the rating of the livre or 
pound, was altered seventy-one times in nine years, between 
1351 and 1360. The evils brought to the French people by 
these alterations in their money standard were terrible ; yet 
our paper-money standard changed far more than seventy-one 
times during the four years of war, and frequently afterward, 
until specie payments were resumed. When the metallic 
-standard was replaced by the paper one, evils immediately 
followed the event, and they increased in number and severity 
with every additional issue of paper money. Throughout the 
war, the evils of an excessive paper money were constantly 
set before the people. One of the first to describe, and also 
to forget them, was Mr. Chase. Of the banks, some of them 
were opposed to government inflation, because they feared an 
increase of prices and other evils ; others were opposed be- 
cause they wished to issue all the paper circulation themselves. 
The question has been often asked whether the bank-notes 
whicli were issued after the suspension of specie payments, in 
place of gold withdrawn from circulation, had any effect on 
prices ; in other words, were an addition to the circulating 
medium. In Philadelphia, during the first part of the year 
1862, the amount of circulation was greatly reduced, in con- 
sequence of the suspension of specie payments, but afterward 
the banks issued a considerable quantity of one, two, and 
three-dollar notes, to supply the place formerly filled with 



140 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

specie,' In other cities a large addition was made to the 
small-note circulation, for the same reason. One bank officer 
maintained that the issue of these notes had no effect on 
prices, because they took the place of the specie, which had 
disappeared. He further maintained, that the circulation of 
his bank would have been much larger, if it had not been 
checked, at times, by using United-States demand-notes. It 
will not be disputed, that the substitution of bank-notes for 
gold and silver, which had formerly circulated, did not affect 
prices, but the entire amount of gold held by the banks at the 
time they suspended specie payments was not in active circu- 
lation. The greater portion was kept as a reserve, and 
exercised no immediate influence on prices. After the sus- 
pension of specie payments, the amount of bank-notes was not 
reduced much iu any State in consequence of that event. The 
subsequent issues by the banks, therefore, so far as they ex- 
ceeded the amount of gold formerly in circulation, were a 
real addition to the currency, whatever may have been their 
effect on prices. If specie payments had not been suspended, 
what would have been the effect of these additions? To 
some extent, probably, prices would have risen. Did that 
event change the effect of these notes when issued ? We 
think not. 

When specie payments were suspended, gold and silver 
ceased to circulate as money ; the former metal became an im- 
portant article of merchandise, and the transactions in it were 
of the most serious nature." Prices were quoted by the paper 
standard. Measured by this, the price of gold fluctuated 
greatly at different times, nor did the prices of other things 
fluctuate in a corresponding ratio. This fact can be easily 
1 17 Bank. Jlag., p. 492. ' Ibid., p. 590. 



1863.] EFFECT OP ISSUING LEGAL-TENDER NOTES. 141 

tested, by comparing the rise and fall in the prices of things, 
including that of gold, with the existing or paper standard.' 
The extent of these fluctuations depended on many things. 

' In his second report as comptroller of the currency, Mr. McCulloch said : 
" In January, 1862, gold in New York was at a premium of one and one- 
half per cent. It soon fell to one, from which it rose, on the 10th of Octoher, 
to thirty-seven, and closed on the 31st of Decemher at thirty-four. On 
the 24th of February, 1863, it had advanced to seventy-two and one-half, 
but on the 26th of March (favorable news having been received from the 
Southwest) it went down to forty and one-half; but in twelve days, on the 
receipt of less favorable intelligence from that quarter, it went up to fifty- 
nine and one-half. A few days, upon the report of the iron-clad attack 
upon Fort Sumter, it fell to forty-six, and on receipt of the intelligence 
of the surrender of Port Hudson to twenty-three and one-half. On the 
15th of October it rose to fifty-four, but reached no higher point during 
that year. On the 1st of January, 1864, it opened at fifty-two, went up to 
eighty-eight on the 14th of April, and fell to sixty-seven on the 19th of 
the same month. On the passage of the gold-bill, June 22, it rose to one 
hundred and thirty and fell the next day to one hundred and fifteen. On 
the 1st of July it was forced up to one hundred and eighty-five, but on the 
day following (the gold-bill having been repealed) it fell to one hundred 
and thirty. On the 11th of the same month it went up again to one hun- 
dred and eighty-four ; on the 15th it fell to one hundred and forty-four, 
and after various fluctuations dropped, on the 26th of September, to eighty- 
seven ; thus rising, between the 1st of January and the 1st of July, 1 864, 
from fifty-two to one hundred and eighty-five, and falling, between the 
1st of July and the 26th of September, from one hundred and eighty-five 
to eighty-seven. None of these fluctuations were brought about by an 
increase or decrease of the currency ; on the contrary, gold rose the most 
rapidly when there was no inconsiderable increase of the currency and fell 
in the face of large additions to it. Nothing can be more conclusive of the 
incorrectness of the opinion that gold is always the standard of value, and 
that the high price it has commanded in the United States during the 
progress of the war is the result of an inflated currency, than this brief 
statement of its variations in the New- York stock mnAet."— Comptroller's 
Beport, 1863. 



142 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

The goods purchased abroad for specie conformed more nearly 
in their fluctuations with those of gold, than the commodities 
produced in this country. Too much space would be required 
to trace these fluctuations here ; beside, the inquiry immedi- 
ately before us is, How far did the action of the government, 
or that of the banks, aifect the price of gold ? Some persons 
maintained that the banks did more than the government to 
cause the advance. An intelligent Boston merchant, in the 
middle of November,' wrote, that the government issues had 
merely increased the circulating medium to a certain extent, 
though not supplying the deficiency caused by the loss of gold 
as currency. The banks, he further remarked, by increas- 
ing their notes and loans, had acted unwisely, because they 
furnished to speculators the means to purchase gold, and to 
hold it with the expectation of selling at a higher figure. In 
December, 1862, there were special deposits of $10,000,000, 
to secure loans of this kind. During the entire period of the 
suspension of specie payments, when gold was bouglit and 
sold, and especially for a speculative purpose, the banks 
aided the speculators by lending them money, secured by a 
deposit of the gold itselC The banks were severely condemned 
for thus aiding the gold speculators; if specie payments 
had been maintained, gold could not have been put on the 
anvil of speculation. The evils resulting therefrom were so 
great, that Congress attempted to prevent speculation in gold 

1 1862. 

' " It is a well-known fact, that soon after the suspension of specie pay- 
ments, it was common for the officers of banks to loan their credit and irre- 
deemable currency upon gold, deposited with tliem as security ; and that 
bank officers of the city of New York themselves became speculators in 
gold, and also urged the same upon their friends through their banks, be- 
cause it was a safe and certain speculation." — Tlie Price of Oold and the 
Presidency. 



18G4.] EFFECT OF ISSUING LEGAL-TENDER NOTES. 143 

and foreign exchange. Contracts were declared unlawful for 
the purchase of gold coin or bullion, ^vhich was to be 
delivered on a subsequent day, or for paying any sums, either 
fixed or contingent, in default of the delivery of gold coin or 
bullion ; or to make a contract on other terms than the actual 
delivery of gold coin or bullion, and the payment in full of 
the agreed price, on the day of making the same. The same 
provision was applied to foreign exchange, " to be delivered 
at any time beyond ten days," subsequent to the making of 
the contract therefor. All dealers in gold were prohibited 
from selling it " at any other place, than the ordinary place of 
business, of either the seller or purchaser," and penalties were 
to be imposed on all who violated the law. 

The secretary of the treasury strongly favored the measure. 
The continued advance in the price of gold was attributed by 
him to two causes — the increase of the notes of local banks, 
and the efforts of speculators. Not many members of Congress 
believed that gold speculation could be suppressed by law. 
That these speculations were harmful to the national credit 
was denied by no one. The belief was general that the specu- 
lators were a body of men who cared far more for their per- 
sonal gain than for their country. Senator Chandler, of 
Michigan, did not hesitate to say that " these gold gamblers, 
as a class," were " disloyal men in sympathy with the South," 
and this opinion was shared by many others. The gold ex- 
change was a swamp wherein human character quickly sank 
and never recovered. The love of gain was fed by sacrific- 
ing the national credit and by encouraging the disloyal. 
How would an undertaker be regarded who, acquiring his 
wealth in burying the dead, rejoiced over the sufferings of those 
around him; yet the gold brokers rejoiced over human 



144 FINANCIAL HISTORY OP THE UNITED STATES. [1864. 

slaughter and national defeat because their gains were thereby 
increased.' 

jSfevertheless, the influence which the gold speculators ex- 
erted in the gold market, as well as the local banks, by ex- 
panding their issues, was exaggerated. Mr. Chase was faulty 
in his diagnosis of the cause of the gold speculation. Many 
causes contributed to heighten the variation. The operations 
of the stock board were only one cause, and not always the 
most important. One of the senators, when discussing the 
gold-bill, stated the causes of the fluctuation so well that his 
words are worth repeating : " It is the immense business that 
your citizens are now carrying on, domestic as well as foreign ; 
it is the immense issue of railroad bonds and State bonds ; it 
is the immense amount of bonds which your local corporations 
throughout the whole extent of the United States are issuing 

' Jlr. McCulloch, Comptroller of the Currency, in his second report, said : 
" Hostility to the government has been as decidedly manifested in the effort 
that has been made in the commercial metropolis of the nation to depreciate 
the currency as it has been by the enemy in the field: and, unfortunately, 
the effort of sympathizers with the rebellion, and of the agents of the 
rebellious States to prostrate the national credit, has been strengthened and 
sustained by thousands in the loyal States whose political fidelity it might 
be ungenerous to question. Immense interests have been at work all over, 
and concentrated in New York, to raise the price of coin, and splendid 
fortunes have been apparently made by their success. . . . Gold has been 
a favorite article to gamble in. It ha.s been forced up by those tricks and 
devices that are so well understood at the stock board. . . . The effect of 
all this has been, not to break down the credit of the government, but to in- 
crease enormously the cost of the war and the expense of living ; for however 
small may have been the connection between the price of coin and our 
domestic products, every rise of gold, no matter by what means eflfected, has 
been used as a pretest by holders and speculators for an advance of prices, 
to the great injury of the government and the sorrow of a large portion of 
the people." 



1864.] EFFECT OF ISSUING EEGAL-TENDER KOTES. 145 

for the purpose of accomplishing some particular local or 
general improvement. The whole, in one sense, is a specie of 
currency, by means of which the business of the country is 
being conducted." ^ A financial publication which looked at 
the fluctuations from a shorter range, said : " The true cause of 
such changes lies in the large volume of paper money, in en- 
hanced prices of commodities, in extraordinary importations 
from abroad, and in the inevitable demand for all the gold we 
can produce to liquidate such importations." ^ The speculators 
were, in truth, less powerful in influencing the price of gold 
than many believed. Whatever may have been their influ- 
ence paper money was a far more potent agency in working 
havoc to the morals of the people and the credit of the 
nation. 

The law was enacted on the 17th of June^ and lived 
only fifteen days. Bom in great doubt, its life, though ex- 
tremely short, was long enough to cause no little commotion 
and harm. While no one was very hopeful of extirpating or 
even lessening speculation in gold by legal process, except, 
perhaps, the secretar}' of the treasury and Senator Lane, of 
Kansas, it was not believed that the law could operate 
injuriously to any person or interest. Yet its operation was 
disastrous. Within a week after enacting the law, the price 
of gold had risen thirty per cent. Had this been the first 
attempt to check the evil. Congress might have been pardoned ; 
but that body had sought to arrest the rise in the price of gold 
bv authorizing the use of gold certificates, and afterward 
by granting authority to the secretary of the treasury to sell 
gold, and neither of these expedients had been successful. 
1 Globe, April 15, 1864, p. 1645. ^ 19 Bank. Mag., p. 3. 

3 38 Cong., first session, chap. 127. 

10 



146 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

Congress might have learned from previous experiments to 
limit the rates of interest that a commercial law, designed to 
prohibit what the people are generally determined to do, will 
not only fail but intensify the existing mischief. No truth is 
more clearly set forth in the strong pages of Buckle. In the 
case of the usurer, he is unwilling to lend unless compensated 
for the danger he incurs when violating the law.^ The gold 
Act had the same eifect as laws of a similar nature designed to 
limit the rate of money. 

A good financial authority and staunch supporter of the 
Union remarked, five days after the enactment of the law, " It 
is one of the most extraordinary and visionary acts of legis- 
lation ever passed in this or in any other country. So far 
from aiding the government in its design to put down specu- 
lation among brokers and speculators, it has had, and will 
continue to have, an entirely different effect. The rate in 
Wall street immediately advanced to two hundred, two 
hundred and five, two hundred and ten, and, in fact, to 
two hundred and twenty-five. This gold Act is only one 
more instance of the utter uselessness of the attempt 
on the part of Congress to interfere with the ordinary 
business transactions of a commercial city. The cause 
of the rise in gold does not, did not, arise in Wall 
street. The cause was in the unwise issue of several hundred 
millions of paper currency at Washington, and in the enor- 
mous importations ^ following this uncalled-for inflation. The 

' " This compensation can only be made by the borrower, who is obliged 
to pay what is, in reality, a double interest : one interest for the natural 
risk on the loan, and another from the extra risk from the law." — Buckk. 

^" The absorption of gold by the public treasury has aided the object of 
the speculators. The more thus taken from the market, the less remains 



1864.] EFFECT OP ISSUING LEGAL-TENDEE NOTES. 147 

treasury has produced this state of things, not the people." 
So ineffective was the gol<I Act to secure the objects desired, 
and so detrimental to the commercial interests of the country, 
that a special meeting of the Chamber of Commerce of New 
York was held on the 2 2d of June, and a memorial to Con- 
gress was prepared, setting forth' the evils of the law and 
asking for its immediate repeal. Congress had enacted the 
law with great hesitation, the Senate discussing the subject 
fully ; the repeal-bill was quickly passed by both houses. It 
was said at the time that no measure of the government had 
produced more surprise or more distrust of the administra- 
tion than the gold Act. Emanating from the treasury, and 
urged persistently on Congress by the head of that depart- 
ment, the effects of the measure re-acted on the adminis- 
tration with great force.' 

Not only was gold pitched into the arena of speculation by 
the suspension of specie payments and the increase of the 
paper circulation, but the exportation of gold was quickened 
and enlarged by these events." At the time of suspending 
specie payments the exchanges were running in favor of this 
country. The rise in the price of gold and foreign exchange 
was first induced by considerable orders from the government 
for foreign war supplies (which could be paid only in gold or 
foreign bills), and afterward stimulated by the return of large 

for the wants of commerce ; and it is a fair conclusion tliat the premium 
upon it will be forced up, just to the extent to which speculators can oblige 
the public to pay for it, through the merchant, who, to supply the public, 
imports merchandise and pays duties upon it. It makes but little difference 
to him what is the rate of gold, so long as the public are willing to pay 
enough in currency to enable him to buy the gold and realize his profit." — 
Tlie Price of Gold and the Presidency. 
• 19 Bank. Mag., pp. 3, 4 and 77. 



148 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

quantities of American stocks belonging to foreign holders 
Avho were frightened.^ These securities were sold at a heavy 
loss.^ This, however, was not the only reason for sending 
gold abroad. Enormous sums were exported throughout 
the war to pay for foreign goods. Many persons who were 
ignorant of the resources of the country, and who had little 
or no faith in its recuperative power, hastily converted their 
cash and securities into gold, though paying dearly for the 
exchange. Others, who possessed surplus capital, invested in 
exchange on England and the Continent, at rates previously 
unknown in Wall street. 

Whatever may be said concerning the public expediency of 
inflating and depreciating the currency, this policy coincided 
with the interests of the sellers of land and all kinds of 
merchandise, because their tide of profits consequently rose 
higher. No one, perhaps, saw this effect more clearly than 
Mr. Morrill. " It is most unfortunate that our currency is 
subject to so great fluctuations, as the tendency is to draw 
even solid men into the arena of speculators, where they may 
invest legal tenders in stocks or other property with a view 
to a rise. This makes it for the interest of all property 

' " The markets of Europe have, for yeafs, been besieged for the purchase 
of American State bonds, railroad shares and bonds, city and other corpor- 
ate bonds. These efforts were successful to an amount variously estimated 
at two hundred to three hundred millions of dollars. Upon the first 
revulsion of the market at home, these securities have been returned to 
Wall street for conversion into gold or exchange on Europe, even at a loss 
of twenty, or thirty, or forty per cent. These orders, to the extent of fifty 
or one hundred millions of dollars, have been executed during the 
current year, and the continual high price of gold and of sterling bills are 
partly the results." — Money market, Jan. No. Bank Mag., 1863. See 
Goschen's Foreign Exchanges, p. 48, 11th ed. 

' 17 Bank. Mag., pp. 491, 587. 



1864.] EFFECT OF ISSUING LEGAL-TENDER NOTES. 149 

holders, and especially large holders of merchandise, to depress 
the value of legal tenders. . . . This speculative fever enables 
all holders of merchandise, whether manufacturers or mer- 
chants, to realize larger prices and larger profits than they 
could otherwise do. With the idea that merchandise is sure 
to rise, they advance prices and realize gains in advance." ' 
Prices rose, therefore, not only as a direct consequence of issu- 
ing and circulating more money, but from the harmonious 
interest and action of the government and sellers, the former 
dilutmg the currency to quicken the sale of bonds, the sellers 
raising prices to get more profits. 

One of the efifects of issuing legal-tender notes was the legal 
discharge of indebtedness without rendering a fair return to 
the creditor. It has been maintained that this Avas one of the 
greatest evils wrought by the Act. The paper dollars given 
in legal discharge of debts were worth much less than the 
specie dollars which debtors had received. This is unques- 
tionably true, yet were not many creditors paid in conse- 
quence of enacting the legal-tender law who would not have 
been, had payment in specie been required? By inflating 
prices it was easier for debtors to discharge their obligations. 

' Cong. Globe, June 2, 1864. " Soon after issuing legal tenders there 
began to be a small premium on gold. In June it had advanced to two 
and one-half per cent, and from that time rose rapidly. The government 
continued to issue greenbacks to meet the pressing exigencies of the nation • 
the banks issued their notes to increase their dividends, and between them 
both, on the first day of December, 1862, they had carried the premium up 
to thirty-three and one-half per cent. This was an alarming state of 
things. All who could appreciate the condition of the currency felt it to 
be so. An important crisis had arrived, and it was as certain as anything 
could be, that the financial policy of the government must be changed, or 
national insolvency would ultimately be the consequence." — Amasa Walker, 
Jan., 1865, 52 Hunt's Mer. Mag., p. 24. 



150 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

If a farmer sold his wheat for ooe dollar and a half per 
bushel, instead of one dollar, the price before the war, 
he would get as much for one hundred bushels in 1864 
as he did for one hundred and fifty in ante-war days. 
If the former price was just sufficient to enable him 
to pay his ordinary expenditures, the advance enabled 
him to pay his debts. Thousands of debts were dis- 
charged which had been running for years, not because debtors 
were content with their condition, but because they could 
not improve it. Though great injustice was perpetrated in 
many cases, in a far greater number creditors were paid who 
would not have been if prices had not advanced. Govern- 
ments do not hesitate to pass bankruptcy laws whereby 
debtors are discharged from their obligations without paying 
the full amount, and sometimes without paying anything ; 
surely the loss which creditors sustained in consequence of 
enacting the legal-tender laws was much less proportionally 
than that of the creditors whose obligations were extinguished 
by the subsequent national bankrupt-law. We think the facts 
sustain the deduction, that while many creditors suffered from 
the operation of the legal-tender law, a much larger number 
rejoiced in receiving money which had long before been 
charged to the profit and loss account. 

If the legal-tender law were advantageous to this class 
of debtors, it was not to subsequent ones. The government 
especially was a heavy loser by the advance in prices. A part 
of the advance was caused by the enormous demands of the 
government. War is an extremely wasteful business, and 
vast quantities of the commodities usually produced were 
demanded beside others, more especially arms and other muni- 
tions of war. Said a thoughtful Avriter, in 1862, " Before we 



1864.] EFFECT OF ISSUING LEGAL-TENDER NOTES. 151 

blame the banks or the government for all the derange- 
ment of the currency, let us ask ourselves whether, if the 
government spent every day one and a quarter millions in 
gold coin, it A\-ould not cause a great inflation in all values." 
The writer maintained, therefore, that much of our financial 
derangement was the result of the war, in distributing large 
sums among us, and not the result of misdoing. If specie 
payments had been maintained, doubtless a large advance in 
prices would have occurred, and the public debt would have 
been correspondingly increased. But prices also rose in con- 
sequence of the enormous increase of the paper circulation. 
Both causes acted immediately and powerfully to enhance 
them. Had specie payments been maintained, or had the 
quantity of the paper circulation been less, the public debt 
would not have been so large. Suspension and inflation con- 
tributed to increase the public burden of indebtedness, the 
weight of which more than one generation will know and feel. 
Private debtors, too, suffered in the same manner as the gov- 
ernment. Their borrowed money had less purchasing power 
than before the inflation of prices. The interest account was 
heavier, the rate, moreover, was often higher, and when the prin- 
cipal was finally paid, after prices had shrunk back perhaps 
to the old figures, then the borrower comprehended the true 
cost of an inflated paper money. At first, it seemed a very 
cheap way to get more money, to make paper and print certain 
matters thereon, and wlien a farmer, for example, borrowed 
it to pay for his farm, and sold his wheat at a dollar more per 
bushel than he did before the era of legal-tender notes, he verily 
thought that paper money was a blessing. When, however, 
the price of wheat declined and the gap of debt could not be 
so easily filled, he learned the cost of taking greenbacks 



152 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

instead of specie when making his loan. Had he borrowed 
specie, the amount required would have been much smaller, 
all prices would have been correspondingly lower, conse- 
quently he could have finally discharged his debt with 
much greater ease. This truth became sadly clear in the 
light of the thousands of bankruptcies which occurred in the 
subsequent era of falling prices.^ 

Another effect of inflating the monetary circulation, it has 
been maintained, was to stimulate subscriptions to the national 
bonds. Did the issue of government paper money, however, 
have such a magical effect in this regard as so many imagine ? 
Of course, all the notes issued discharged an equivalent 
amount of public debt. When received by the government- 
creditors — soldiers, employees, contractors — they were soon 
exchanged for other things. IMany creditors bought govern- 
ment-bonds with them. Suppose the government, instead of 
issuing notes to its creditors, had issued bonds to them in 
discharge of their indebtedness, would the notes have been 
necessary in that event in order to stimulate subscriptions ; 
surely not. But the government simply issued promises to 
pay to all creditors, and afterward exchanged one kind of 
promises for another. In truth, creditors took various kinds 
of government obligations for their claims, demand treasury- 
notes that were not legal tender, legal-tender notes, notes run- 
ning from a few weeks to three years, bonds, certificates of 

' Samuel Hooper, one of the most influential and intelligent advocates of 
the legal-tender legislation, remarked, in a speech in the House, in February 
21, 1866, "The losses and the inconvenience caused by the depreciation of 
the money of the country in consequence of the addition of the legal-tender 
notes to the circulation, were certainly greater than was expected by those 
who initiated and advocated the measure ; partly because the war assumed 
a greater magnitude and a longer duration than was then expected." 



1864.] EFFECT OF ISSUING LEGAL-TENDEE NOTES. 153 

indebtedness ; in short, whatever the government gave. Those 
bearino; no interest Avere often converted into bonds, because 
these were considered the most desirable investment of the 
time. What stimulated the purchase of bonds was not the 
issue of more paper money, but the employment of more men 
at higher wages, the purchase of enormous quantities of goods 
by the government at exceedingly profitable prices to the 
sellers, whereby they suddenly became the possessors of large 
means to invest in new ways. 

One of the principles which regulate the quantity of money 
needed by a country is the rapidity of its circulation, and a far 
more important one in our time is, how far can checks and 
bills of exchange be used as a substitute. Money is always 
circulated more slowly by the government than by individuals, 
yet it could have obtained all that was needed without diluting 
it. When profits in business increased, — in other words, when 
the people recovered from the depression which existed at the 
outbreak of the war, and made money, — they had a surplus for 
fresh investment and their subsequent large and speedy 
profits were the consequence mainly of the enormous demands 
by the government. During the year 1879, the heavy cloud 
of depression which had hung over the country for six years 
passed away, and the people once more began to add to their 
wealth. Business everywhere revived, thousands of spindles, 
long silent, gave forth a cheery sound, and many a place was re- 
lighted with furnace-flame. The farmer, too, rejoiced over 
splendid crops, and a better market. The price of almost every- 
thing advanced, the record daily made in account books was 
speedily changed, profits were entered instead of losses, and 
laro-e sums were accumulated. New railroads were planned, 
and other colossal enterprises were launched in which this 



154 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

newly-created wealth was invested. That golden wave of 
prosperity, which rolled over the country like the outburst of 
the earth on the return of the sun, cannot be traced to a new 
monetary supply, for there wad none. The people had money 
to invest because they were making money. The money loaned 
to the government during the first year of the war was not 
drawn from immediate profits ; much of it was idle capital, 
like that in the banks at the present time. But the amount 
was not very great. After a short period every man was busily 
and profitably engaged. Fortunes increased rapidly, and 
from these sources the treasury was replenished. 

The existence of so much paper money, or the fear of its 
depreciation, stimulated its circulation. Every addition to 
the quantity increased the use of it, and thereby aggravated 
the evil of its presence. In April, 1864, a liepublican mem- 
ber of the Committee of "Ways and Means touched on this 
subject in a speech in the House, in which he said : " The 
common impulse has been to get rid of the currency of the 
country. Thus, every man and woman in the nation seeks to 
own something that cannot perish. The manufacturer buys 
and fills his factory with the raw material, the merchant his 
warerooms with the merchandise with whicli he is familiar, 
the capitalist his trunk with bonds, mortgages, and stocks ; 
while the speculator, watching the advancing tendency of all 
kinds of securities, uses his credit to its utmost tension, trades 
to the extent of millions in local stocks, securities and commo- 
dities of the country." 

The effect of issuing government-notes on importations is 
not easily determined. "A redundant currency," wrote 
Amasa Walker, in 1875, "always increases importations, 
especially of luxuries, and causes a demand for gold for 



1864.] EFFECT OP ISSUING LEGAL-TENDEE NOTES. 155 

exportation. The statistics of the national treasury show 
indisputably that importations are governed by the currency. 
The larger the volume of the currency, the greater the amount 
of foreign imports. Nothing is more certain than the oper- 
ation of this law."^ On former occasions, when the issues 
of paper money were expanded, it was redeemable in gold. 
As specie payments were now suspended, the premium on the 
gold bought to pay for the goods imported, and the duties 
thereon, were added to the price which importers asked for 
them. Had all prices followed the depreciation of paper 
money measured by the gold standard, we suppose that im- 
portations would not have been affected by the government 
issues. Instead of following the depreciation thus measured, 
prices greatly varied from it. So far as the advance in prices 
exceeded the premium on gold, one might reason that the 
tendency was to check importations ; in truth, money had be- 
come so abundant that the demand for the products of the Old 
World, especially those of luxury, was unparalleled.^ 

The effect of issuing this flood of paper money on labor has 
been the theme of many an investigation. Wages did not rise 
in harmony with other things. One reason was, because only 
an actual demand for labor exists, while for other commo- 
dities an actual is often supplemented by a speculative demand. 
During the period of inflation and adjustment to a higher 
level of prices, wages were the slowest of any important com- 
modity to advance. Unquestionably laborers were among the 
heaviest sufferers from expanding the paper circulation.^ 

The expediency of paying interest in gold was often ques- 

' 52 Hunt's Mer. Mag., p. 26. ^ See page 446. 

« See Investigation relative to the Causes of the General Depression in 
Labor, House Mis. Doc., No. 29, 45 Cong., third session. 



156 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

tiooed. One class stoutly maintained that such a policy was 
essential to the public credit. Mr. Sherman remarked, in a 
Senate speech, in 1870, "If the interest on our bonds had not 
been payable in coin during the war, it is probable that in the 
terrible depreciation of 1864 our paper money would have 
disappeared, and the people would have resorted again to 
barter in gold, in disregard of our legal-tender currency." ^ On 
the other hand, it was contended" that by employing gold for 
this purpose its value was enhanced. " Permit the importers 
to pay the go\erument in its own notes, and not only will gold 
fall in value for lack of a market, but the value of the legal- 
tender notes will be enhanced from enlarging their field of 
employment." 

The last effect of inflating the circulation to be noticed here 
was to stimulate speculatiLiu. To Pope's benediction — 

" Blest paper credit ! Last and best supply, 
To lend corruption lighter wings to fly," 

speculators could heartily respond even though a lighter 
wing A\as given to corruption. They were as hopefully ex- 
cited by the event, though springing from a national calamity, 
as were the oligarchs of Athens " who traded on the 
agony of their country." Speculation was stimulated in 

' Mr. Sherman continued : " This simple provision for the collection of 
duties on imports in gold, and the payment of interest in coin, was the only 
conservative security of our paper system. Without that, the paper balloon 
might have exploded, as it did in the Revolutionary war in the time of our 
fathers, as it did in the French revolution by the issue of assignats and 
moudats, and as it did in the Southern Cunfederacy, where it ended in the 
entire destruction of the public credit of the Confederacy, at one time higher 
in the money market of Great Britiiin than our own." — Speeches, p. 241. 

' See Erskine Hazard on the Currency, p. 3. 



1864.] EFFECT OF ISSUING LEGAL-TENDER NOTES. 157 

part, by the sudden increase of -nealth, and especially by 
the sudden creation of a class of rich men, government 
contractors, and the like. The speculation which broke out 
in gold, and raged with stupendous fury, spread like a prairie 
fire to stocks and other things. The rapid fortunes that were 
made by the bold pioneers in speculation, " stimulated the 
cupidity of the whole community." Many a commercial 
reputation, which had remained unyielding amid the fiery 
blasts of numberless temptations, was disintegrated by this 
subtle and malign power. Said Mr. Stebbins, of New York, 
in the lower House of Congress, in the spring of 1864, 
" But few men are to-day disinterested spectators of this 
wonderful mania. Prices have steadily and rapidly advanced 
for more than two and a half years. It is impossible for this 
state of things to continue without ruin to the people, and 
destruction to the government. This fact is so transparent, 
that it needs no argument to prove it." Prices afterward 
passed through a long period of depression, and then recovered, 
and are falling for a second time ; but the fever of speculation, 
which was first thoroughly kindled by the manipulation of 
gold after the suspension of specie payments, and which was 
quickly intensified by the unsettling of prices through 
the introduction and common use of a distrusted monetary 
instrument, has been raging with increasing fury, and is the 
most serious foe with which honest legitimate business has to 
contend.^ Of the evil legacies left by the war, this is one of 
' In 1865 when Mr. McCulloch was at the head of the treasury depart- 
ment he delivered a speech at Fort Wayne, Indiana, in which he said : 
" There are other objections to the present inflation. It is, I fear, corrupt- 
ing the public morals. It is converting the business of the country into 
gambling, and seriously diminishing the labor of the country. This is 
always the effect of excessive circulation. The kind of gambling which it 



158 FINANCIAL HISTORY OF THE UNITED STATES. [1864. 

the worst, and shows no sign of permanent exhaustion. 
There have been short lulls, occasioned usually by lack of 
means, but the desire to accumulate a fortune in a day, greatly 
quickened, if not originating, in the early war speculations, 
has not yet been satisfied. On the other hand, that desire, 
so destructive to morality, to good government, to social 
order, to the ordinary and rightful methods of business, is 
burning more fiercely than ever. Enthralled like the legally 
defined gambler, every loss sustained by the speculator, instead 
of producing a sobering effect, excites him to try again, in 
order to retrieve himself, and thus the game is continued with 
increasing desperation, and with losing hope of ever stopping, 
until overtaken by bankruptcy or the grave. 

produces is not confined to the stock and produce boards, where the very 
terms which are used by the operators indicate the nature of the trans- 
actions, but it is spreading through our town and into the rural districts. 
Men are apparently getting rich, while morality languishes and the pro- 
ductive industry of the country is being diminished. Good morals in busi- 
ness, and sober, persevering industry, if not at a discount, are considered too 
old fogyish for the present times." 



1861.] TAXATION AND GROWTH OF PUBLIC DEBT. 159 



CHAPTEE IX. 

TAXATION AND GKOWTH OF THE PUBLIC DEBT. 
JULY 1, 1861— JUNE 30, 1862. 

Me. Chase's report to Congress in July, 1861, contained 
the remark, that " to maintain a sound financial condition a 
system of taxation was required that would produce a sufiicient 
revenue to pay all the, ordinary expenses of the government in 
time of peace, the entire interest on the public debt, beside 
creating a gradually increasing fund for the redemption of the 
principal." It was not important, he said, two years after- 
ward, " so long as it seemed highly probable that the war 
would be speedily brought to a successful close, that the reve- 
nue should largely exceed the ordinary expenditures and the 
interest. On the contrary, it seemed wisest to obtain the 
means for nearly the whole of the extraordinary expenditures 
by loans, and thus avoid the necessity of any considerable in- 
crease of burdens of the people at a time when the sudden 
outbreak of flagitious rebellion had deranged their business 
and temporarily diminished their incomes. The financial 
administration of the first fiscal year was conducted upon these 
ideas." Congress, regarding the future with equal hope, at the 
special session in 1861, provided for raising by loan all the 
money which the secretary deemed needful to carry on the 
war. Of course, it was impossible to make an accurate esti- 
mate of the expenditures, for the future could not be foretold. 



160 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

The monthly receipts for 1861 disappointed expectations, 
and the opinion soon spread that a revision of the tax laws 
would be necessary for the purpose of increasing the revenue. 
The secretary had estimated that $57,000,000 would accrue 
from customs during the fiscal year 18G2. This estimate was 
based on the modification of the tariff law in the manner 
recommended in his first annual report. Congress did not go 
so far as he desired in increasing the duties on tea, coffee, and 
sugar, while goods on ship-board and in ware-houses were 
exempted. " However warranted by considerations of gen- 
eral policy," remarked Mr. Chase, in his report in 1862, "the 
action of Congress was certainly disadvantageous to the reve- 
nue." He added, however, that a more efficient canse of 
reducing receipts was the changed circumstances of the 
country, which were unfavorable to foreign commerce. The 
receipts for the first quarter were $7,198,602.55, and for the 
second, $8,309,066.47. The secretary, therefore, reduced his 
estimate of receipts from this source for the year to $32,198,- 
602.55. 

The direct tax, too, was a disapj^ointing measure. Of the 
$20,000,000, $14,846,018 were apportioned among the loyal 
States, and the remainder, $5,153,982, among those in rebel- 
lion. The Act provided that each State and territory, and the 
District of Columbia, might pay its own quota, if notice of 
this intention were given before the following February. A 
deduction of fifteen per cent on the quota was made to the 
States which collected and paid the tax.' All the States, 
territories, and the District of Columbia, formally assumed the 

'Nothing was gained by this deduction. The effect was to put the 
amount to be collected at a higher figure. See llr. Morrill's speech in the 
House, March 12, 1862. 



1861.] TAXATION AND GROWTH OF PUBLIC DEBT. 161 

payment of the tax, except Delaware, the territory of Colorado, 
and the eleven rebellious States. The government proceeded 
to collect the tax in Delaware and Colorado through internal 
revenue officers, and in the rebellious States through direct 
tax commissioners. At the time of enacting the law the gov- 
ernment was indebted to each of the States for money advanced 
to pay for enlisting and equipping soldiers. This indebted- 
ness was applied toward the sums apportioned to each State. 

The States ^\'hich owed money to the government paid it ; 
the next year Congress suspended the operation of the law 
until April, 1865. In 1864, however, this form of taxation 
M-as extinguished, except in collecting what was yet due to the 
government.^ The United-States direct tax commissioners 
completed the assessment rolls of the insurrectionary States, 
levied on lands, and sold them, and collected about one-half of 
the apportionment. These proceedings continued for many 
years, and have, in truth, even yet hardly ended. Sums due 
from the government, arising from the sale of land in some of 
the States in which they had a pecuniary interest, ^vere applied 
on the tax. Xo revenue consequently, or only a very small 
sum, and hardly worth mentioning, came into the treasury 
from the direct tax.^ The income tax was not to be assessed 
until the beginning of 1862. 

The measures devised at the special session for increasing 
the national income by taxation, were, therefore, failures. 

' The States included the amount with the other taxes laid on the towns 
and cities, and collected the same without any appreciable expense. See 
Amasa Walker, 50 Hunt's Mer. Mag., p. 104. 

2 Eeport to Cora, of Inter. Itevenue, July 14, 1870, Ex. Doc, No. 312, 41 
Cong., second session ; California Case, 5 Comp. Lawrence's Decisions, p. 
333 ; Direct Tax Case, 3 Ibid., p. 331 ; 4 Ibid., p. 354. 

11 



162 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

The revenue from imports fell off; internal taxation yielded 
nothing. The nation had lived on borrowed money. 

When Congress convened in December, many believed, but 
not all, that no time should be lost in introducing a more pro- 
ductive system of taxation. The expenditures were rajjidly 
increasing, more than half a million soldiers were in the 
field, and the estimates for the fiscal year were increased to 
$543,406,422.06. Clearly, the time had come for drawing 
more deeply from the well of taxation. Evident as this was 
to many, the secretary, in his annual report, handled the 
subject very gingerly. After wisely declaring, that " the 
first great object of reflection and endeavor should be the re- 
duction of expenditure within the narrowest limits," and that 
" the property of rebels should be made to pay, in part at 
least, the cost of the rebellion," he restated the principles by 
which he conceived the proportion of taxation and loans, which 
were the sources of income, should be determined. He said 
that reflection had only confirmed his opinion, that adequate 
provision by taxation for ordinary expenditures, for prompt 
payment of interest on the public debt, and for the gradual 
extinction of the principal, was indispensable to a sound 
system of finance. The idea of perpetual debt was not of 
American nativity, and should not be naturalized. " If, at 
any time, the exacting emergencies of war constrain to tempo- 
rary departure from the principle of adequate taxation, the 
first moments of returning tranquillity should be devoted to 
its re-establishment in full supremacy over the financial ad- 
ministration of aflairs." What use did he make of these 
principles in his recommendations to Congress? It was 
" now even more apparent " than in July that duties would 
not furnish a fruitful source of revenue. Some modification 



1861.] TAXATION AND GROWTH OF PUBLIC DEBT. 163 

of the existing tariff might be judiciously made, both to in- 
crease the revenue, and sustain American labor, skill, and 
trade. Though believing that the income from this source 
would increase during the last half of the fiscal year, he said 
it became the duty of Congress to direct its attention to revenue 
from other sources. 

What, then, were the secretary's recommendations with re- 
spect to direct and internal taxation? In his judgment, it 
would be necessary to increase the direct tax, so as to produce 
from the loyal States a revenue of at least $20,000,000, and 
to lay such duties on stills aud distilled liquors, on tobacco, 
on bank-notes, on carriages, on legacies, on paper evidences 
of debt, and instruments for conveyance of property and 
similar subjects of taxation, as would produce as much more. 
The existing provision for an income tax, just in principle 
because requiring " largest contributors from largest means," 
might "possibly, and if somewhat modified," produce 
$10,000,000. The secretary had screwed himself up to the 
point of recommending the raising of $50,000,000 by direct 
and internal taxation. 

" The secretary is aware that the sum is large ; but seeing, 
as he does, no probability that the revenue from ordinary 
sources will exceed forty millions of dollars during the current 
year, and knowing, as he does, that to meet even economized 
disbursements, and pay the gradual reduction of its principal, 
the appropriation of ninety millions of dollars will be necessary, 
he feels that he must not shrink from a plain statement of the 
actual necessities of the situation." 

And this was as far as the secretary dared go ! Did ever 
a financier present a more luminous exposition of the road to 
ruin ! " It must be seen at a glance," he remarked, " that the 



164 - FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

amount to be derived from taxation forms but a small portion 
of the sums required for the expenses of the war." " For the 
rest/' he added, " the reliance must be placed on loans." If 
Mr. Gladstone erred in trying to put the entire burden of 
the Crimean war on the English people at once, Mr. Chase 
erred in delaying to put on as much as they were willing or 
desirous to bear. Why did he not recommend going deeper 
into the pockets of the people ? Could they not afford to pay 
more ? It required no argument from him to show that the 
people could bear such a burden, although he presented one. 
He utterly misconceived their temper. It is said that the 
bankers and other leading men in New York sought to dis- 
suade him from recommending larger taxation. Horace 
Greeley was among the number. They feared that the war 
would become unpopular if heavy taxation were imposed. 
The secretary was moved by this fear, and also by the expec- 
tation that the war would end in 1862. 

Congress gauged the feelings of the people more perfectly. 
On the 11th of January, at a meeting of bank delegates, held 
in Washington, at which the Finance Committee of the 
Senate and the Committee of Ways and Means of the House 
were present, they recommended a tax-bill to raise $125,000,- 
000, in addition to the duties on imports. A joint resolution 
was introduced into the House on the 15th of January, declar- 
ing the intention of Congress to levy such an internal tax as 
would, with the duties on imports, raise a yearly revenue of 
$150,000,000. The resolution passed the House with only 
five dissenting votes. How different was their action from the 
timid recommendation of the secretary ! This pledge carried 
the six-per-cent bonds of the government from ninety cents 
on the dollar to one hundred and seven. Were the money 



1863.] TAXATION AND GROWTH OF PUBLIC DEBT. 165 

kings of New- York City afraid of taxation for themselves 
and for the country ? The members of the chamber of com- 
merce of that city have always been influential citizens, 
and in this trying exigency they did not hesitate to act! 
The secretary of the treasury certainly could not have been 
skaken by consulting with them. On the 24th of April, 
the chamber memorialized Congress, and declared "that 
the masses of the people are ready and desirous to contribute 
their quota to the ordinary and extraordinary revenues of the 
country, so that the burden of expenditure may be equitably 
distributed between the present generation and that which 
shall immediately succeed us." The chamber further declared 
that " the current expenditures of the government during the 
present and coming fiscal years demand an annual public 
revenue of at least $250,000,000, and that probably no less 
sum will be adequate to the prompt payment of such ordinary 
annual expenditures, the payment of the interest on the public 
debt, the establishment of a sinking fund, and finally, — the 
restoration of the public credit to such a point or condition as 
will enable the treasury to negotiate on favorable terms the 
requisite loans of the present and future years." 

What a gap between these figures and Mr. Chase's $90,- 
000,000 ! If he were " aware " that internal taxation to the 
amount of $50,000,000 was " large," what did he think of the 
memorial of the patriotic and far-sighted business men of New 
York ? They prayed Congress to frame a revenue system that 
would yield .$264,000,000, of which sum, $50,000,000 should 
be paid on imports, and the remainder be levied on the sales 
of goods' and other property, excises, and a direct tax. Had 
Mr. Chase grappled with the question of taxation, as the New- 
' See remarks on the plan, 16 Bank. Mag., p. 917. 



166 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

York Chamber of Commerce grappled with it, and prepared 
bills embodying his views for introduction into Congress as 
soon as that body convened, a vast sum would have been 
saved to the country. After the adjournment of the special 
session in August, he did nothing, and left the members of 
Congress to grope their way along this intricate subject as 
best they could. This was the question of all questions 
on which they needed information to act intelligently, and 
after the joint resolution above mentioned was passed, months 
elapsed before a bill could be matured providing for increased 
taxation. The Ways and Means Committee lost no time in 
considering the subject, but it was vast, and much labor was 
required to collect information, and hammer a bill into proper 
form. The secretary could have done much of this work for 
the committee, and forwarded legislation by months, thus 
getting the measure earlier into operation, and swelling the 
national revenue, and what, at that time, was far more import- 
ant, improving the public credit. Thomas Jefferson has 
recorded that "it is a wise rule, and should be fundamen- 
tal in a government disposed to cherish its credit, and at the 
same time to restrain the use of it within the limits of its 
faculties, never to borrow a dollar without laying a tax in the 
same instant for paying the interest annually, and the prin- 
cipal within a given term, and to consider that tax as pledged 
to the creditors on the public faith." This salutary principle 
Secretary Chase did not fully comprehend, or hesitated to 
apply. We can find no excuse for his halting tax-recommend- 
ations, and for his neglect to obtain the needful information, 
and prepare the necessary bills. The only reason that can be 
given for the secretary's action is, he did not comprehend the 
importaace of taxing heavily and with the utmost promptitude, 



1863.] TAXATION AND GROWTH OF PUBLIC DEBT. 167 

nor did he, at that time, believe the war would continue longer 
than a few months, participating in the almost universal belief, 
says his biographer, that with the preparations which the gov- 
ernment was making, " the war might be ended in a single 
year." ^ This opinion did not fade out until McClellan's 
miserable peninsular campaign failure. 

Nine months had already gone and not much revenue had 
been drawn from internal sources. Every consideration of 
public policy required that these should be efiectually opened 
without longer delay. 

The direct tax law, enacted at the special session in 1861, 
provided for the appointment of officers to execute it. The 
chief officer was to be called a commissioner of taxes, and, 

' Scliuckers, p. 332. Mr. Schuckers makes the following plea for the 
secretary: "If the extreme prostration of the business interests of the 
country be borne in mind, and the important fact that the largest sum — 
exclusive of loans — ever collected from the people in any one year, and that 
a year of unusual apparent prosperity (1856), was but a fraction over sev- 
entv-four millions (§74,056,699.24), it will be conceded that Mr. Chase 
recommended the highest safe limit. It is important to remember also, 
that the income of the government from all the sources of permanent reve- 
nue, during the four fiscal years of Mr. Buchanan's administration, was but 
a fraction over §225,000,000. In 1857, it had been |68,965,312; in 1858, 
846,655,365 ; in 1859, 153,486,465 ; and in 1860, it was 856,054,599. The 
income from the same sources during the fiscal year ending June 30, 1861 — 
eight months of which were passed under the administration of Mr. 
Buchanan, and four under that of Mr. Lincoln, was but $41,476,299. The 
income from loans and treasury-notes during the years 1858, 1859, 1860, and 
1861, was 8114,686,900, of which $41,895,300 was derived during the fiscal 
vear ending .June 30, 1861. The income from customs during the last 
quarter of 1861 was but $5,515,000. From this brief statement, it is appar- 
ent that if the government had been dependent for support upon income 
from taxes, it would have been in imminent danger of a collapse, even in a 
period of unhealthy peace." 



168 FINANCIAL HISTOEY OF THE UNITED STATES. [1868. 

uuder the direction of the -secretary of the treasury, was to 
have the general superintendence of the officers and the col- 
lection of the taxes. No appointment, however, was made, for 
the loyal States having assumed to pay the tax, it was not 
necessary to put any machinery into motion to collect it. 
The law, though, was of some worth to the Committee 
of Ways and Means in forming a bill to collect a larger 
revenue, in accordance with the spirit of the joint resolution 
which had been passed so promptly by both houses. 

Mr. jMorrill, of A'^ermont, was chairman of the sub-com- 
mittee, to whom were entrusted the preparation of a bill. 
They labored faithfully on the subject and reported on the 
3d of March. A week having been given for printing and 
studying the bill, on the 12th he opened the discussion by 
showing what amount ought to be raised by internal taxation 
and the principle on which the measure was based. At the 
extra session $250,000,000 in bonds and treasury-notes had 
been authorized, and at the present session $610,000,000 
more securities " under all forms." With the previous debt 
the nation would owe $950,000,000. If the war continued 
through the year 1863, after deducting all receipts into the 
treasury, the public debt would be "nine or ten hundred 
millions of dollars. The interest on the debt would be 
$60,000,000 or more, the ordinary expenses would not, under 
any circumstances, be a smaller figure, and the military estab- 
lishment would probably require an additional $25,000,000 
for several years after the close of the war. We must 
pay," he said, " all our ordinary expenses, the interest on all 
public debt, and, over and above this, have a respectable 
sinking fund to retii-e some portion of the public debt 
annually, and this over-plus must be sufficient to guard 



1862.] TAXATION AND GROWTH OP PUBLIC DEBT. 169 

against all contingencies." The financial measures in con- 
templation, he sought to show, would yield even more than 
the above demands on the treasury. 

The committee therefore had based their bill on sound 
principles. In preparing it they had gained information " of 
considerable value " from correspondence, while gentlemen 
interested in many branches of industry had been before the 
committee, and given facts touching nearly the whole range of 
subjects covered by the bill. Mr. Morrill said that in few 
instances had any of these gentlemen asked to be exonerated 
or exempted from their proper share in sustaining the gov- 
ernment. " It is true," he remarked, " that some were will- 
ing, perhaps, to see pilgrims by their side bearing a larger 
pack than they felt to be wise or prudent for their o^^'n backs, 
but all were willing, and even anxious, to contribute what 
appeared to them to be just and reasonable ; and some were 
willing to contribute much more on the ground that, if the 
dutv should be a light one, they could make no advance on 
the consumer, whereas if it should be heavy, they would at 
once be furnished with an argument to put up prices upon 
stocks on hand, as well as on all amounts hereafter produced. 

"There is, perhaps," he added, "an eagerness in some 
quarters for high and extravagant duties upon some par- 
ticular article, which might be cited as conspicuous evidence of 
patriotism, if it could be certainly known that the parties had 
not already provided an ark for a wet day, and housed their 
stock beyond the reach, as they suppose, of any duty or tax. 
Seeking to avoid all extremes, the committee thought best 
to propose duties on a large number of objects, rather than 
confine them to a narrow field, and thereby be forced to 
make them excessive in amount, and for that reason entirely 



170 FINANCIAL HISTORY OF THE UNITED STATES. [1862. 

unreliable. If the rates could be thereafter increased in any 
instance to the benefit of the revenue, and without inflicting 
any injury upon any quarter of the country, this would 
soon be ascertained." This was quite contrary to the doctrins 
of the New- York Chamber of Commerce, and Boston Board 
of Trade. 

The duties proposed by the bill rested heavily on spirits 
and malt liquors — about one hundred per cent on raw whiskey, 
fifty per cent on rum, and twenty-five per cent on ale or beer. 
These duties were far below the point at which even some 
prominent distillers thought they might be safely carried, and 
yet largely above the point indicated by the majority of those 
engaged in the business. The iiaen who were supposed to 
have stocks on hand, and those who would destroy the traffic 
regardless of revenue, for once agreed in the propriety of an 
exorbitant tax. Alcohol used in the arts and manufactures 
was to be taxed in proportion to its strength, and on whiskey 
exported a drawback was to be given for the full amount of 
the duty. 

Luxuries were to be another source of revenue. The bill 
embraced merchants, traders, bankers, brokers, auctioneers, 
distillers, brewers, peddlers, manufacturers, theatres, hotels and 
taverns, professional men, and other classes. The amount of 
revenue from this source was estimated at $3,000,000. 
Though not generally required in this country, licenses in 
England were regarded among the least objectionable modes of 
taxation. The strongest objection was the novelty of imposing 
on any lawful occupation a license from the national authority 
for its exercise. This objection, said Mr. Morrill, " nearly 
vanishes, when it is considered that a license is not so much a 
permit for carrying on business, as a recognition of the trade, 



1868.] TAXATION AND GEOAVTII OF PUBLIC DEBT. 171 

and a designation of the prenii.-ies in -wliich the business is to 
be conducted." It was also a shield against unauthorized and 
irregular competition. 

The duty proposed on unmanufactured tobacco was three 
cents per pound, and no drawback ou that exported. A duty 
was proposed on illuminating agents. " Gas, when properly 
made, from its brilliancy, absence of odor, cheapness, and con- 
venience, will always remain the paragon of lights; and those 
who turn on and off its splendors at will, can generally afford 
to pay, and do pay, very remunerative prices for its use. 
Here is an instance," added Mr. Morrill, " where either party 
is presumed to be able to meet the duty ^vithout hardship." 

A duty of three per cent was proposed on manufactures, 
with some exceptions. These would not come out of the 
manufacturer, though a depression or glut of the market would 
make him suiFer loss. The cost of the manufectures to the 
amount of the duty would be borne by the consumer, "as 
much as if added to the cost of the labor or the raw material." 
The drawback allowed would preserve the foreign market to 
the American manufacturer. " It was not thought best to 
propose duties on raw materials generally, but to wait until all 
the cost, in the finished state at the time of sale, ^vas added to 
the production, and thus assess the duty on the largest values." 
From this source it was expected that $50,000,000 of revenue 
would be derived. " But it will be indispensable for us to 
revise the tariff on foreign imports, so far as it may be seri- 
ously disturbed by any internal duties, — on some things the 
tax proposed is more than the present tariff, — and to make 
proper reparation ; otherwise, we shall have destroyed the goose 
that lays the golden eggs. From such a revision, including 
some articles that hitherto it has not been considered sound 



172 FINANCIAL HISTORY OF THE UNITED STATES. [1862. 

policy to take from the free list, and lower schedules of the 
tariff, it is expected also to increase the revenues several mil- 
lions of dollars. If we bleed manufacturers we must see to 
it that a proper tonic is administered at the same time. There 
are many articles, however, where the tariff is now high 
enough for revenue or protection, which will receive no ad- 
vance." 

Eailroads also were subjected to taxation. " To adjust an 
equitable tax " on them was one of the difficult problems for 
the committee to, solve. The committee proposed a duty of 
three per cent on the season or commutation tickets, and on 
the coupons or interest paid on bonds, and a duty of two mills 
on passengers, other than season-ticket passengers, for each 
mile traveled. By adopting such a plan, the tax was appor- 
tioned somewhat between the owners of the road, whether 
foreign or domestic, and whether represented in the form of 
stock or debt. Railroads could add the duties to their rates 
of fare if they chose to do so. IMoreover, to deal justly by 
them and the people, the duty was extended to steamboats and 
other vessels. 

Stamp duties on legal and commercial documents were also 
proposed. England once tried the experiment of collecting 
such a duty of the American colonists, but did not succeed. 
" Practically," Mr. Morrill said, such duties were " as un- 
objectionable " as any which could be collected. A large 
revenue was expected from this source. Advertisements were 
also to be taxed, the committee believing that the burden 
would fall on the person for whose benefit the advertisement 
was published. 

Last, the committee proposed to retain the income duty, 
which was a feature in the excise bill passed at the previous 



1862.] TAXATION AND GROWTH OF PUBLIC DEBT. 173 

session. The amount of the exemption was changed from 
8800 to §600. This duty, said Mr. Morrill, " is one, per- 
haps, of the least defensible that, on the whole, the committee 
concluded to retain or report." The objection to it was that 
nearly all persons would be already taxed on all sources of 
income. This, therefore, would be a double tax. There 
were few persons in the country who had any fixed incomes 
for a term of years. The dividends of banks, the interest on 
railroad bonds, and United States official salaries, including 
members of Congress, had been elsewhere subjected to duties. 
" The income tax is an inquisitorial one at best ; but, looking 
at the considerable class of State officers, and the many thous- 
ands who are employed on a fixed salary, most of whom would 
not contribute a penny unless called upon through this tax, 
it has been' thought best not to wholly abandon it. Ought not 
men, too, with large incomes to pay more in proportion to 
what they have than those with limited means, who live by 
the work of their own hands, or that of their families?" 

Such are the outlines of one of the most important bills 
considered by Congress during the war. With the exception 
of the legal-tender bill, there was no other which called forth 
such prolonged and serious discussion. Ten thousand extra 
copies of the report were printed and distributed, and opinions 
and facts were solicited from every quarter. 

On the next day, after Mr. Morrill's speech, amendments 
were offered and the remainder of the discussion was on these. 
The debate continued almost daily until the 8th of April, 
when the final vote was taken. Mr. Stevens made a short 
speech of a general nature at the close. He remarked, 
among other things, that the committee were, by the Canadian 
reciprocity treaty, obliged to omit many articles which, with 



174 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

a light tax, would have produced a large revenue. The bill 
passed by a vote of one hundred and twenty-six to fifteen. 

On the 25th of May the debate began in the Senate by 
sections. The House amendments were so numerous that 
the Finance Committee greatly hesitated to report the bill 
with them for the consideration of the Senate. Mr. Sim- 
mons, of Rhode Island, wished to substitute another bill 
which he had prepared, and Mr. McDougal, of California, 
had a second substitute to oifer. The debate was continued 
almost daily until the 6th of June, when Mr. Fessenden, in 
the only formal speech during the progress of the bill, closed 
the long debate. He gave an account of the financial condi- 
tion of the government, considered its future needs, the desire 
of the people to be taxed, the things that were to be taxed, 
the principal changes in the bill since it had come from 
the House, and the machinery by wliich it was to be executed. 
The bill provided for the appointment of a collector in- each 
district, who was to receive not over $10,000 a year for his 
services, and who was to appoint his deputies and pay them. 
An assessor was to be appointed for each district, who, in turn, 
was to appoint his assistants. Collectors were to be appointed 
for each district. Each set of officers would be a check on 
the other, the Senate adopting the system then generally exist- 
ing among the States. The bill passed the Senate by a vote 
of thirty-seven to one, and ^vas returned to the House laden 
with three hundred and fifteen amendments. As the House 
non-concurred in the Senate amendments, they were consid- 
ered by a committee of conference, who agreed on a report. 

One of the more important amendments changed the 
pay of collectors from one to two per cent after the col- 
lection of $100,000 of revenue. Another amendment related 



1863.] TAXATION AND GROWTH OF PUBLIC DEBT. 175 

to the taxatioa of whiskey. A tax of twenty cents a gallon 
was imposed in lieu of all other taxes. On tobacco the 
Senate had raised the tax voted by the House. The confer- 
ence committee agreed to a tax of fifteen cents per pound on 
tobacco worth more than thirty cents per pound, and a tax of 
ten cents per pound on tobacco of less valuation. A different 
tax was laid on snufF and some other articles. Cigars were 
divided into three grades, worth five, ten, and fifteen dollars 
per thousand. These were taxed one dollar and a half, two 
dollars, and three dollars respectively. • The gravest point of 
difference was over the retention of the direct tax, which the 
Senate had repealed. The conference committee, on the part 
of the House, refused to consent to the repeal, believing that 
the landed property would be taxed inadequately, and that an 
unjust burden would be thrown on the commercial and man- 
ufacturing interests. The Western States declared through 
their representatives that they could not raise the money to 
pay the tax. One reason for laying the tax was, it reached 
the property of foreign residents. The committee finally 
agreed to suspend its collection, except the first, laid in July, 
1861, for two years. With respect to the income tax, three 
per cent was to be collected on all over $600, and not exceed- 
ing $5000, and five per cent on all incomes exceeding the 
latter figure. The time for calculating personal income was 
the Ist of May, 1862, and the tax was to be collected annually. 
A drawback was allowed on all articles exported, equal to 
the internal tax, except that on cotton.^ Afterward rock oil 
and other articles were added to the list of exceptions. The 
cotton manufacturers, however, were relieved of the burden of 
tax on raw cotton in another way. The tax paid by them on 
'■ Drawback Regulations, Ex. Doc, No. 41, 39 Cong., second session. 



176 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

their goods of three, and subsequently of five per cent, was 
refunded, beside half a cent a pound on their goods, which was 
advanced to two cents near the close of the war. 

The time fixed in the original bill for the law to become 
operative was the 1st of July, 1862 ; so much time, however, 
had been consumed in maturing the measure, that the execution 
of it could not begin before the 1st of August. The House 
agreed to the report, one hundred and six voting in favor, 
and only eleven against it.^ This was on the 23d of June. 
More than four months had been spent by the two Houses in 
considering the bill, and it was one of the most important and 
far-reaching laws ever enacted by Congress, and justified all 
the study, investigation, and debate given to it. Many mem- 
bers thought, notwithstanding all that had been said on the 
subject, that far more time should have been given to the 
consideration of the measure. This was the case, particularly 
with the Senate amendments, which were considered only by 
the conference committee. 

Defects in the law were soon apparent. On the 14th of 
July a joint resolution was passed declaring that the provision 
relating to stamps should not operate until the 1st of Sep- 
tember, and thirteen days later the law was further modi- 
fied in several particulars, beside vesting the secretary of 
the treasury with the anomalous authority to fix the dates 
when many of the provisions should begin to operate. 
It was not enacted in time to bring revenue into the treasury 
during the fiscal year of 1862. The duties on tea, coifee, 
sugar, and molasses, were increased on the 24th of December,^ 
1861, as recommended by Mr. Chase, and on the 14th of July ' 

' Act, July 1, 37 Cong., second session, cliap. 119. 

' Act, Ibid., chap. 2. » Act, Ibid., chap. 163. 



1862.] TAXATION AND GEOWTH OF PUBLIC DEBT. 177 

following, another Act was passed, increasing temporarily the 
duties ou sugar, molasses, tobacco, iron and steel, drugs and 
chemicals — in short, on nearly the entire list of imports previ- 
ously taxed. An additional tonnage tax of ten per cent was 
imposed on merchandise produced east of the Cape of Good 
Hope, when not imported directly from the place of pro- 
duction, but from intermediate ports.' These regulations 
wrought many radical changes. Two reasons existed for rais- 
ing the duties on imports ; one was to secure the home pro- 
ducer from the consequences of internal taxation, and the other 
to enlarge the revenue. Both reasons were so cogent that 
the measures encountered no serious opposition. 

The receipts from the imports during the last half of the 
fiscal year 1862 exceeded those of the first half, as the secre- 
tary had predicted. For the third quarter, closing with 
]\Iarch, they amounted to $14,618,558, and for the last 
quarter, §18,930,170. For the year, they reached $49,056,- 
397. Trade and industry had improved, and the increase 
in imports which had now begun was to continue for many 
years. During the last quarter of that year the direct tax 
yielded $1,795,331 to the treasury, while less than a million 
dollars were received from the sales of land and' miscellaneous 
and incidental sources. 

Notwithstanding the smallness of receipts from taxation, 

the indebtedness for the year had not exceeded the estimate. 

The July estimate was revised and increased in December, 

in consequence of enlarging military operations after making 

the first estimate. The estimated indebtedness stated in the 

secretary's December report was $517,372,802, and at the close 

of the year the actual indebtedness was $514,211,371.92. 

' Act, July 14, 37 Cong., second session, chap. 163, sec. 14. 
12 



178 FINANCIAL HISTORY OP THE UNITED STATKS. [1832. 

This amount, though, did not include unascertained claims, 
but only the debt, " the evidences of which," as stated by 
Mr. Chase, " existed in the treasury upon its books, or in the 
form of requisitions in favor of creditors or of disbursing 
officers." The unpaid bills, happily, were not supposed to 
be much larger than the balance in the treasury, $13,043,546. 
And what was obtained for this vast expenditure? Cloth- 
ing, provisions, and munitions of war, which were speedily 
destroyed. Nothing more? Yes, a residue, which cannot 
be reckoned in terms of wealth. The life and wealth spent 
in the civil war was to, rescue an imperiled country, and 
which, having become more truly incarnate through the suc- 
cessful sacrifice incurred, is regarded with deeper affection 
than it was before. Tried by the standard of wealth, the 
war was an enormous loss ; tried by a higher standard, the 
magnitude of the gain is becoming more apparent as we recede 
from the event. 



J86a.] TAXATION AND GROWTH OF THE DEBT. 179 



CHAPTER X. 

TAXATION AND GEOWTH OP THE DEBT. 
JULY, 1862— SBPTBMBBB, 1865. 

Although the public debt at the beginning of the fiscal 
year did not exceed the expectation of Mr. Chase, he frankly 
declared, in his next annual report, that there was no room for 
the pleasing hope that the results of that or the following 
year would " exhibit a similar proportion." On the contrary, 
the estimate in his former report of the public debt on the 
1st of July, 1863, in consequence of the unexpected increase 
of expenditures, was advanced to $1,122,297,403. If the 
war should be continued until the 1st of July, 1864, with 
undiminished disbursements, the debt would be increased pro- 
bably to .§1,744,685,586. 

Mr. Chase did not shrink in giving as nearly correct esti- 
mate as possible of the cost of the war. He was besought in 
the beginning to make small figures, his advisers fearing that 
if he told the true story the people would be appalled and 
lose faith. Not so thought Mr. Chase. Though fearing 
to tax, he did not fear to tell how much would be required. 

The interest on the debt at the beginning of the second 
fiscal year of the war was not large. The secretary had tried 
to reduce the cost of the debt in the form of interest to the 
lowest possible amount, and " it was a source of real satisfac- 
tion to him " that he had confined it thus far " within very 



180 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

moderate limits. The first loans being of a magnitude 
hitherto undreamed of in our market, were necessarily made 
at an interest which he regarded as high, though lenders 
strenuously insisted on higher;" but large amounts at the date 
of his report bore only four and five per cent, while the circu- 
lation of United-States notes constituted practically a loan 
from the people to the government without interest. The 
average rate on the whole loan was thus reduced to four and 
three-fifths per cent. 

The nature and amount of the public debt at the close of 
the fiiscal year, June 30th,' 1862, may be summarized : 

Mr. Chase had borrowed by authority of the laws enacted 
previously to March 4, 1861, during the first four months 
of his administration of the treasury, or to the close of 
the fiscal year in 1861,1 $14,412,529' 

During the next year $60,000,000 of demand treasury-notes 
were authorized : $50,000,000 by Act of July 17, 1861, 
and $10,000,000 by Act of Febi-uary 12, 1862, payable for 
duties, and afterward made a legal tender. Of this 
amount there were outstanding, 53,040,000 

$150,000,000 of legal-tender notes were authorized by Act of 
February 25, 1862, of which amount there had been 
issued, 96,620,000 

Treasury-notes payable in three years, bearing 7.3 interest, 
payable semi-annually, and convertible into twenty-years' 
six-per-cent bonds, were authorized by Act of July 17, 
1862. Under this Act the secretary had issued, . . 122,836,550 

The banks had taken $100,000,000 of these for the first and 
second installments of their $150,000,000 loan. 

The banks had taken bonds authorized by the Act of July 
17, 1861, bearing six per cent interest, and running from 
five to twenty years for their third installment, . 50,000,000 

' Treas. Eeport, July, 1861, p. 18. 

'The total debt at that time was $90,867,828. 



1863.] TAXATION AND GROWTH OF THE DEBT. 181 

Certificates of deposit bearing from four to five per cent inter- 
est had been issued. The first amount authorized was 
$25,000,000 by Act of February 25, 1862, increased to 
$50,000,000 by Act of March 17, 1862, and to $150,000,000 
by Act of June 30, 1864. Amount issued June 30, . 57,746,116.57 

Certificates of indebtedness payable one year from date, bear- 
ing six per cent interest. These were authorized by Act 
of March 1, 1862, 49,881,979.73' 

The income from taxation was largely increased during the 
fiscal year 1863. The receipts corresponded closely with the 
estimates from every source of revenue except that of internal 
revenue, which was less than half the estimated amount. One 
reason was because many had made their purchases in antici- 
pation of the law, and needed much less for a considerable 
time afterward. A part of the deficiency was attributed to 
the imperfect execution of the law, and a part to changes in 
the rates of taxation by Congress subsequent to the estimate. 
Leaving out these explanations the amount collected probably 
would not have been more than half the amount estimated 
and required. 

The law therefore needed amendment, especially for the 
purpose of increasing the revenue. Congress had tried to 
enact an effective measure, and deserved no blame for the 
result. The subject was new, the time for investigation and 
deliberation was short, and only in the light of experience 
could the measure be made perfect. Congress might have 
begun to tax sooner, yet the general feeling prevailed that the 
war would be short, the indebtedness incurred light, and conse- 
quently that resort to internal taxation was unnecessary. These 
hopes were crushed, and in the summer of 1862 an internal 
revenue system was adopted. Three years, however, were to 
1 Total debt on June 30, 1862, was $514,211,371. 



182 FINANCIAL HISTORY OP THE UNITED STATES. [1863. 

go by before much revenue could be gathered from this 
source. 

The law was amended next March/ but several of the 
changes unfavorably affected the revenue. Petroleum was 
taxed one dollar on a barrel. A tax on sales was first adopted 
in the Senate, by the vote of the Vice-President, and finally 
by two majority, and by a similar majority in the House after 
two rejections, but in the end, defeated by the committee of 
conference. The most difficult tax to adjust in the bill was 
that on the circulation of the banks. ]Mr. Sherman intro- 
duced the first bill on the 4th of July, 1862, in which he 
proposed that any person, corporation, or association, should 
pay a duty of two per cent on bills issued for circulation as 
money. The duties were to be paid at the end of each quarter 
on the largest amount of bills issued during that period. 
The subject had been frequently discussed in the Senate 
Finance Committee, and by bankers and commercial papers. 
Mr. Sherman favored the measure because he believed it was 
" an imperative " necessity for the government of the United 
States to drive gradually out of circulation the local bank 
paper. The amendment was rejected by a vote of ten to 
twenty-seven, and at the next session the subject was elabo- 
rately considered in connection with the $900,000,000 loan-bill. 
The banks were paying a tax of three per cent on their earn- 
ings, beside stamp duties. The Senate and House differed 
strongly on the question of taxing their circulation, or rather 
on the nature of it. Both houses favored a tax, but the 
Senate tax was the highest. The Committee of Ways and 
Means reported in favor of a tax of two per cent on the cir- 
culation of banks exceeding a certain amount. After passing 
' Act, March 3, 37 Cong., third session, chap. 74. 



1863.] TAXATION AND GROWTH OF THE DEBT. 183 

the bill, the Senate also passed it with amendments, many of 
which were accepted by the House. A committee of con- 
ference attempted to adjust the others, and they succeeded in 
adjusting all except the one which taxed the bank circulation. 
Finally, on the last day of the session, the committee agreed. 
The Senate had proposed to tax bank circulation one per cent 
for two years, and two per cent afterward. The House pro- 
posed to tax the circulation two per cent above a certain scale. 
The law prescribed that the banks should pay one per cent 
semi-annually on the average amount of their circulation 
issued beyond a prescribed amount.^ 

One of the glaring defects of the law was the payment of a 
tax on all dividends of mutual life insurance companies, thus 
classing them with the banks, fire insurance, and stock life 
comjianies, in which capital is invested with the expectation 
of producing income. The execution of this part of the law 
was difficult. The dividends of those companies were declared 
■ and paid in such a variety of forms, " as not merely to embar- 
rass the assessment of taxes upon them, but to render any 
really equitable adjustment of them impossible." Further- 
more, the difficulty existed not in the organization of the com- 
panies, but in the law itself, for the returns made to insurers, 
although called " dividends," were" not, in any sense, income," 
or revenue derived from the investment of capital. The com- 



Banks not having 


over 


$100,000 capital, . 


90 per cent. 


Over 6100,000, and not over 


200,000 


" 


80 


{{ 


Over 200,000, 




300,000 


11 


70 


U 


Over 300,000, 




500,000 


It 


60 


(I 


Over 500,000, 




1,000,000 


(( 


50 


u 


Over 1,000,000, 




1,500,000 


(( 


40 


it 


Over 1,500,000, 




2,000,000 


it 


30 


u 


Over 2,000,000, 






(t 


25 


a 



184 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

missioner of internal revenue recommended that for tins tax 
a stamp tax be substituted on the policies issued by such com- 
panies. He believed that fifty cents on each thousand dollars 
insured might be levied without oppressing the companies, or 
discouraging the demand for insurance. This change was 
afterward made. 

The administration of the law clearly showed that a much 
larger revenue ought to be derived from distilled spirits and 
beer. The experience of England, in the meantime, had been 
more carefully ascertained. The comtnissioner recommended 
that a tax not less than sixty cents a gallon be levied on distilled 
spirits, and a tax of one dollar and a half per barrel on beer, 
or a tax of thirty cents a bushel on malt. This was regarded 
the pi'eferable tax, because it could be more easily collected. 

On petroleum, the commissioner thought that for the exist- 
ing tax, one should be substituted on the crude article before 
distillation. The fact is worth mentioning, that to articles on 
which drawbacks were allowed when they were exported, the 
application of this principle was considered " obviously 
injudicious." It was apparently a direct discrimination 
against the people of this country, and in favor of all other 
nations, in supplying which nature had given us almost a 
monopoly. As European nations were accustomed to tax 
products, the growth of this country, severely in importing 
them, the commissioner considered the matter worthy of con- 
sideration whether t!ie moderate duty now imposed on this 
oil might not be maintained when produced for export. 

The tax on tobacco was too light. The proposition was 
submitted to tax the leaf in the possession of the producer 
twenty cents a pound, and without drawback on any exported 
in that form. Such a policy would encourage and sustain our 



1864.] TAXATION AND GEOAVTH OF THE DEBT. 185 

manufacturers against adverse legislation of a foreign gov- 
ernment. A light additional tax varying from five to twelve 
cents a pound the commissioner favored on the manufactured 
commodity ! " A drawback," he remarked, " on this from 
ten to fifteen cents would give to the domestic manufacturer 
all the advantage he would desire in the foreign market, and 
would, in some measure, countervail the legislation of foreign 
nations to his prejudice." Many other recommendations were 
contained in this report which can not be noted here. The 
changes in rates were mostly in the direction of increasing the 
amount, and the number of things taxed. The law had been 
not merely endured, but welcomed by the people, and it was 
believed that increased taxation would be borne without much 
murmuring. The law was thoroughly revised in accordance 
with the commissioner's recommendations, and enacted at the 
end of June the following year.' 

On the same day Congress enacted another law which 
increased the duties on imports. Mr. Morrill, when reporting 
the bill, said that the object was " to increase the revenue upon 
importations from abroad, and, at the same time, to shelter and 
nurse our domestic products," from which the largest part of 
our revenue was drawn, so that the aggregate amount should 
not be diminished through the substitution of foreign articles 
for those which we had been accustomed to make at home. 
Domestic products having been taxed, it was necessary to 
impose additional taxation to an equal amount on similar 
foreign products, otherwise the foreign producers would have 
gained by the change. There was, however, considerable 
opposition to the bill. Mr. Morrill, when explaining it to the 
House, admitted that the rates were high nominally, and might 
1 Act, June 30, 38 Cong., first session, chap. 173. 



186 FINANCIAL I-IISTOEY OF THE UNITED STATES. [1864. 

be SO regarded by foreign nations, but considering the weight 
carried by our own people, other nations would be able to 
continue the race with us on nearly the same terms as before. 

The duties on imports were paid in specie, the internal 
taxes in currency. On the other hand, the imports were paid 
on a foreign specie valuation, while the internal taxes were 
paid on a currency valuation. Mr. Morrill contended that 
one of the taxes " very accurately " equalized the other. 

One class of persons favored higher duties, not to strengthen 
the position of the American competitor, nor to swell the public 
revenue, but to increase their own profits on the stocks they 
held. This effect of increased taxation became so well under- 
stood, that the rumor of doing so was often skillfully used to 
advance prices. 

As teas had been recently advanced fifty per cent, no addi- 
tional tax was imposed on them. One of the most perplexing 
questions was the adjustment of duties on wool and woolen, 
" so as to obtain a revenue and at the same time to distribute 
justice to all parties." A concise statement was made of the 
previous efforts to adjust their interests and the effect of those 
adjustments. The bill proposed a compound duty, consisting 
of a graded tax on wools of different values, and an ad valorem 
tax on the manufactured products. The former was intended 
to cover the increased cost of the wool entering into the com- 
position of the domestic product occasioned by the duty on 
^vool, and the object of the ad valorem duty was protection to 
the American manufacturer. As raw cotton was taxed two 
cents a pouud, " self-preservation required very much higher 
rates in the tariff on all cotton goods." The duties on drugs 
and preparations composed in part of alcohol were raised to 
meet the increased cost of the latter product. The tariff on 



1864.] TAXATION AMD GEOWTH OF THE DEBT. 187 

iron and steel was raised as much as the internal tax, and 
slightly beyond in a few cases. The duties on silks were 
largely increased ; those on salt were not touched. 

The Committee on Ways and Means did not recommend 
extravagant or prohibitory duties for the most cogent reasons. 
The government sought revenue and such duties would defeat 
that object. Said Mr. Morrill, in closing his address, " With 
the home taxation now unavoidable, we are forced to levy far 
higher duties than usual in order that the industry of the 
country may not languish, and that we may largely and pro- 
perly stimulate the productive energies of the nation to create 
that wealth of which we daily use and destroy so much. But 
to go beyond this point for the mere benefit of those with 
large stocks on hand, or to create higher prices where prices 
are already high enough, would be attended with great danger, 
as we should advance prices upon the consumer so much as 
to create discontent among the people, and with no benefit to 
the treasury. When the profits of any business are suddenly 
increased, new and inexperienced men rush in, and in a short 
time create the severest competition which trade and manufac- 
tures ever have to encounter. At this time it would not be 
wise to encourage more men to adventure upon new enter- 
prises than the country will be able to sustain at the close of 
the war." 

The chief opponents of the bill in the House were Messrs. 
Cox, Ward, and Fernando Wood. It passed by a vote of 
eighty-four to twenty-seven, was carefully debated in the Sen- 
ate, amended, and the disagreements between the two houses 
were settled by a committee of conference.* 

While the treasury department and Congress were busy 
' Act, June 30, 38 Cong., first session, chap. 171. 



188 FINANCIAL HISTORY OF THE UXITED STATES. [1864. 



revising the tax laws to remove inequalities, and especially to 
obtain more revenue, the inflow steadily enlarged. The actual 
receipts from imports for the fiscal year 1864 exceeded by nearly 
thirty millions the estimated receipts of $72,562,018, while 
the receipts from internal revenue, which had been less than 
forty millions for the ten months of 1862, during which the 
law was in operation, increased to $108,260,320 the follow- 
ing year. The other item of receipts worth mentioning was 
the miscellaneous, which was unusually large, amounting to 
$47,511,448.1 

The tax on manufactured goods at first drew forth great 
opposition from almost every branch of business,^ but after 



' This sum was obtained from the following sources : 
Captured and abandoned property .... 

Premium on gold shipped from San Francisco to London 
Sales of prizes and due to captors 
Internal and coastwise intercourse fees 
Premium on sales of gold coin 
Commutation money 
AH other sources .... 



$2,146,715 
2,799,920 
4,088,111 
5,809,287 
16,498,975 
12,451,896 
3,716,542 



' In the February number of Hunt's Mer. Magazine for 1864, Amasa 
Walker wrote : " During the last session of Congress, a manufacturer came 
on from the East, with the special purpose of obtaining a reduction, or 
entire exemption upon his particular branch of manufacture. Meeting a 
member in one of the lobbies, the following dialogue took place : 

Manf I came on, sir, to get relief from an oppressive burden on my 
branch of tlie business. There are particular reasons why the article I 
make should be exempted from the three-per-cent tax. 

M. C. What amount do you manufacture annually? 

Manf One hundred thousand dollars worth, on which I pay $3000. 

M. C. And you reckon the tax you pay as part of the cost of your article, 
and add it to the price, do you not ? 

Manf. Why, yes, sir. 

M. C. "\\' liat average profit do you calculate to make on your goods? 



1864.] TAXATION AND GROWTH OF THE DEBT. 189 

the transmission and diffusion of the tax became general, it 
was borne as uncomplainingly as any other. The manufac- 
turers in the Northwest suffered more from it in the becinnincr 
than those in other sections. They were taxed by the law of 
1862 three per cent on their sales. Prices had not then taken 
tliat tremendous rush upward whereby fortunes were made in 
a day and men grew dizzy with delight. The law was 
founded on the idea that the consumer always paid the tax. 
This they maintained was a manifest error. The manufac- 
turers of the Northwest endeavored to get the law modified, 
and recommended an uniform tax on sales.. It was objected 
that no sales would be made, and that all transactions would 
be carried on by way of exchange. The further objection 
was made that such a law would subject articles to more than 
one tax, and to this it was answered that the existing law 
was open to the same criticism ; a conclusive objection was that 
Congress had not time to perfect a bill of so radical a charac- 
ter, and that before attempting to do it the existing law should 

Manf. Fifteen per cent. 

il. C. Then you make fifteen per cent on the amount you pay in taxes, 
which if it be $3000, will give you |450 more profit than you would get if 
you paid no taxes. Is it not so ? 

The gentleman had no answer prepared to this question, and the con- 
versation closed. Mr. Walker added : ' No disadvantage to the manufac- 
turer accrues in consequence of taxes directly imposed upon' his fabrics. 
He charges the amount upon his goods as tax, as the importer charges the 
duties he pays upon his merchandise, and the consumer ultimately pays 
all, together with the profit on the same. The latter is the only one who 
can make any reasonable objection to this kind of taxation. Such duties in 
no way cripple the manufacturing interest, unless they be so high as to 
materially lessen the consumption, and that point is very far from being 
reached in our present revenue system, and they may be largely increased 
without detriment, if necessary.' " 



190 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

have a longer trial. Not despairing, the manufacturers tried 
to get the principle embodied in the law of levying " but one 
tax on the same article, or, in other words, of taxing enhanced 
values only, in the instances of manufactures passing through 
successive stages of fabrication." Mr. Morrill, who had charge 
of the subject, said, that if the principle proposed should be 
adopted, the revenue would be reduced $30,000,000 to |40,- 
000,000 per annum, and to this he could not consent at that 
time. The Committee of Ways and Means admitted its cor- 
rectness in discussing the bill, and only because revenue was 
so much needed did they oppose the adoption of the princi- 
ple. Nevertheless, they consented to some modifications in 
the direction sought by tlie manufacturers.^ 

Though much better than the former law, it was imperfect 
in many respects. It had been hastily engrossed ; and when 
put in operation a considerable number of defects appeared. 
They would have been less numerous had the people been 
more willing to pay their taxes. The officers, however, who 
administered it were becoming more competent, they inter- 
preted it more uniformly, and enforced it more effectively. 
The revenue steadily increased, and it was believed that if the 
law could be uniformly and strictly enforced no necessity 
would exist for increasing taxation. To remedy the principal 
evils, the penalties in certain cases were increased. A uniform 
tax was imposed ou cigars, all tobacco, snuff, and cigars were 
to be inspected, and a commission was allowed on all collec- 
tions in order to furnish an additional incentive for collecting 
the revenue. 

The worst defect in the law of 1864, affecting the imme- 
diate revenue, was the postponement of the tax on whiskey — 
' Eep. of Com. of Manuf. Association of Chicago, 1863. 



1865.] TAXATION AND GROWTH OF THE DEBT. 191 

which had been increased from one dollar and fifty cents to 
two dollars — until the 1st of February. It is singular that, 
with the experience Congress had already gained in taxing 
this article, the tax was not made immediately operative. By 
postponing its operation, the distillers began to increase the 
supply as fast as possible, in order to get the full benefit of 
the new tax. Having found out the mistake, when Congress 
convened in December, the time for executing the law was 
set back to the first of the year. 

Among other amendments proposed at this time, were two, 
which, though submitted by the Committee of Ways and 
jNIeans, did not have their recommendation. One of them 
related to a tax on the circulation of State banks, and the 
other on sales. The latter tax had been recommended by the 
Chamber of Commerce of New York, and the Boston Board of 
Trade, and other associations in 1862.^ The Boston associa- 
tion remarked in their report on the subject : " Such a duty 
would reach every kind of business, and under it all classes and 
parties would fare alike. The well-to-do farmer, the pros- 
perous merchant, the thriving manufacturer, and the laborious 
artisan, would each and all contribute to the support of the 
government, and to the maintenance of public credit in just 
proportion to the amount of their business. The natural 
equipoise of the various interests would remain undisturbed ; 
and all the repinings and jealousies and heartburnings which 
follow in the wake of partial legislation would be effectually 

' The Chamber of Commerce of New York recommended a tax of one 
per cent on all sales of goods and other property at retail and wholesale, 
and estimated an annual yield of 1115,000,000, April 25, 1862. The .op- 
position of this and similar associations to an income tax was as strong as 
their recommendation in favor of a tax on sales. Proceedings, 1863, p. 28. 



192 FINANCIAL HISTOEY OF THE UNITED STATES. [1865. 

foreclosed. The tax being thus justly distributed^ and, con- 
sequently, the rate moderate, much of the temptation to 
evasion, held out by unequal and excessive rates of the bill 
[then before Congress], would be removed." ^ These views 
were approved by the New York Chamber of Commerce. 

The experiment of taxing sales was not new. Adam Smith 
had long ago informed the world how the Alcavala, or ten- 
per-cent tax on sales had operated in Spain. Through the 
greater portion of the country to which the tax was applied 
nothing could be produced for sale. To that tax was imputed 
the ruin of Spanish manufacturers. In Holland, too, the 
people, though bearing patiently the Duke of Alva's revenge- 
ful cruelties and religious persecutions, revolted when this tax 
was laid on them. Many differed from Mr. Morrill, who 
strongly opposed the tax. When the subject was before the 
House, in the spring of 1865, he said : " It may be that the 
only way to satisfy its advocates of the impolicy of this 
measure will be to test it." He felt certain, if adopted, that 
the first thing the people would demand at the next session 
would be its repeal. " Taxes to be tolerated at all," he con- 
tinued, " should be equal. If taxes were placed upon sales, 
then those living near the place of production would have 
advantages not available ' to those remote, in addition to the 
less cost of freight. The merchandise, foreign or domestic, 
from the Atlantic coast, before it reaches the Mississippi, 
passes through the hands of many owners, and according to 
the theory of taxing sales, its cost would be increased at each 
successive transfer. The tax would be cumulative, and 
the internal commerce of our country, always free until now, 
would be choked or dammed up, confined to narrow localities. 
' Keport on Internal Taxation, p. 10. 



1866.] TAXATION AND GROWTH OP THE DEBT. 193 

We should destroy that great feature of America, the spirit 
and enterprise of trade. Of what use would it be to produce 
and to manufacture, if the channels of trade were to have 
obstructions placed in the way, and rising higher and higher 
at every step. Better could the manufacturers and producers 
afford to pay the whole tax now than to have it imposed in 
this form." 

It would also revolutionize trade and drive out of employ- 
ment the middle men. In the cities only men of large capital 
and the importers and wholesale merchants would be patron- 
ized. Jobbers, retailers, and country merchants would buy 
of the original importer, if he chose to break up original pack- 
ages. Those who desired to buy at retail would seek the 
stream of merchandise at the fountain head before its cost 
would be increased by repeated taxation. It would increase 
the prices of every raw material, of every perfected manu- 
facture, out of all proportion to the amount of revenue to be 
attained. To the consumer it would be the most expen- 
sive of all taxes in proportion to the amount realized. Nor 
could it be fairly and fully collected. More frauds and 
evasions would be practiced than under any other provisions 
of the internal revenue laws. The number of men not keep- 
ing an account of their sales would multiply. 

The two sides were very strenuous in their views. The vote 
in the House was exceedingly close, fifty-eight to fifty-six, 
and equally close in the Senate, twenty-two to twenty. The 
bill went to a committee of conference, and they finally de- 
cided to report against the amendment. Senators Howe, of 
Wisconsin, and Harris, of New York, not reconciled to the 
action of the committee, prolonged the contention. They were 

obliged to yield and the experiment was not tried. 

13 



194 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

The amendment relating to the circulation of banks, pro- 
posed by Mr. Hooper, of Massachusetts, was in accordance with 
the recommendation of the secretary of the treasury and 
comptroller of the currency in their annual reports. The 
object of the amendment was to put such a tax on the circula- 
tion of State banks which had changed to national ones, or had 
ceased to exist, and whose circulation had been assumed, by 
national banks, as would cause its retirement, and thus secure 
a uniform currency. The tax, therefore, was not designed for 
revenue purposes, but to put an end to the circulation of the 
State banks. The amendment was defeated, and then he 
offered another, which met a similar fate. In truth, fourteen 
amendments were offered and debated. No section of the bill 
received so much attention ; finally, Mr. Wilson, of Iowa, 
offered one that every national banking association, State 
bank, or State banking association should pay a tax of 
ten per cent on the amount of notes of any State bank, 
or State banking association, paid out by them after the 
1st of July, 1866. This was carried and has never been 
repealed.* 

Increased taxation was recommended by the Committee of 
Ways and Means on some articles, especially on domestic 
wines or brandy, or malt liquors ; also, a tax of six cents a 
pound on cotton, payable in coin ; nor was there any draw- 
back to be allowed on cotton exported. The Confederate 
government had imposed a tax of twenty cents a pound on it, 
payable in their greatly depreciated currency, but as a cotton 
famine existed and the price was enormously high, it was 
believed that the tax would be paid. Though not reducing 
the duty on refined petroleum, a duty of six cents per gallon 
' Act, March 3, 1865, 38 Cong., second session, chap. 78, sec. 6. 



1865.] TAXATIOK AND GROWTH OF THE DEBT. 195 

on crude petroleum ^Yas proposed without any drawback when 
exported. This, including the present duty of twenty cents on 
refined, would be equal to twenty-eight or twenty-nine cents 
per gallon ; " even then, at its market price, next to the sun, 
it was the most economical light in the world." It was 
proposed to increase the tax on manufactures from five to six 
per cent. " It is to be borne in mind," said Mr. Morrill, " that 
taxes of this kind paid on manufactures can only be defended 
by the necessities of the day, as each addition lessens the 
power on the part of the people for consumption, and do not, 
like duties on imports, give any compensation by an impetus 
to the industry of the country. As legislators in this critical 
period in our history, I think it indispensable to our success in 
the great contest now going on, that we should see to it with 
the most earnest solicitude that every man, every machine, 
every engine, and every mill is kept constantly and profitably 
employed. The capital expended in war is gone forever, and 
unless the productive energies of the country are skillfully 
and properly directed to a daily repair of this waste, we shall 
at the close find the people irretrievably impoverished." 
" The income tax, intrinsically the most just of all taxes, is 
yet one extremely difficult of adjustment and collection. The 
fault found with our present law is that too many large 
incomes partially escape which ought to contribute more fully. 
Every man would be content provided his neighbor paid his- 
just proportion. This we have attempted to remedy by pro- 
vidincr that in all cases returns shall be made under oath, and 
that even then this shall not be final unless the assessor shall 
be satisfied of their correctness. We also propose that all 
incomes over $3000 shall be assessed at ten per cent." Most 
of the recommendations of the committee were adopted, and 



196 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 



the law marked top high water in internal revenue taxation.^ 
The war ended the following mouth, and no longer did the 
trying problem of increasing the revenue confront Congress. 
The debt on the last day of March, 1865, was $2,366,955,077, 
composed of the following items : ^ 

Funded debt 11,100,361,241 

Matured debt 349,420 

Temporary loan certificates 52,452 328 

Certificates of indebtedness 171,790 000 

Interest-bearing notes 526,812,800 

Suspended or unpaid requisitions 114,256 548 

United-States- notes (legal tenders) 433 160 569 

Fractional currency 24 254 094 

$2,423,437,000 
Cash in the treasury 56,481,924 

' Act, March 3, 1865, 38 Cong., second session, chap. 78. 
' Ann. Treas. Report, 1867. 



1861.] THE NATIONAL BANKING SYSTEM. 197 



CHAPTER XI. 

THE NATIONAL BANKING SYSTEM. 

Eaely in his administration of the treasury, Mr. Chase 
pondered over the expediency of replacing the State banlc cir- 
culation with one furnished by national banks as a means 
primarily for sustaining the government. The banks in the 
loyal States were circulating at the beginning of the war about 
SloO,000,000 of their notes, and ]Mr. Chase, in his first 
annual report, inquired whether, as the whole of this circula- 
tion constituted a loan without interest from the people to the 
banks, costing nothing except the expense of issue and in- 
terest ou the specie kept for redemption, " sound policy did 
not require that the advantages of this loan be transferred, in 
part, at least, from the banks, representing only the interests 
of the stockholders to the government, representing the 
aggregate interests of the whole people." 

]Mr. Chase fortified his position with the remark, that the 
most eminent statesmen had questioned whether a currency 
of bank-notes issued by local institutions under State laws 
was not, in truth, prohibited by the national constitution. 
Such emissions, he maintained, certainly fell within the spirit, 
if not within the letter, of the constitution, prohibiting the 
emission of "bills of credit" by the States, and of their mak- 
ing anything except gold and silver coin a legal tender in 
payment of debts. But the Supreme Court of the United 



198 FINANCIAL HISTORY OF THE UNITED STATES. [18G1. 

States, twenty-five years before, had decided that a private 
corporation, authorized by a State, liad the right to issue cir- 
culating notes, although the State itself could not, and make 
them receivable for dues to it. " However this may be," 
added the secretary, " it is too clear to be reasonably disputed 
that Congress, under its constitutional powers to lay taxes, to 
regulate commerce, and to regulate the value of coin, pos- 
sesses ample authority to control the credit circulation which 
enters so largely into the transactions of commerce, and affects 
iu so many ways the value of coin. In the judgment of the 
secretary, the time has arrived when Congress should exercise 
this authority." 

Two plans were proposed by the secretary. The first plan 
was the gradual withdrawal from circulation of the notes of 
private corporations, and the substitution of " United-States 
notes, payable iu coin on demand, in amounts sufficient for 
the useful ends of a representative currency." The second 
plan was to prepare and deliver to institutions and associa- 
tions notes for circulation under national direction, secured by 
the pledge of United-States bonds and other needful regula- 
tions, and convertible into coin. 

The first plan had been partly adopted at the last session 
of Congress, when the secretary was authorized to issue $50,- 
000,000 of United-States notes, payable in coin. That 
authority, the secretary remarked, might be so extended as to 
reach the average circulation of the country, while a moderate 
tax, gradually augmented, on bank-notes, would relieve the 
national from competition with the State circulation. The 
substitution of a national for a State currency would be 
equivalent to a loan to the government without interest, 
except on the redemption fund, and without expense, except 



1861.] THE NATIONAL BANKING SYSTEM. 199 

the cost of preparation, issue, and redemption, while the people 
would get a uniform currency and bear a smaller burden in 
the form of interest ou the public debt. 

The secretary then strongly stated the objections to this 
plan. " The temptation, especially great in times of pressure 
and danger, to issue notes without adequate provision for 
redemption ; the ever-present liability to be called on for 
redemption beyond means, however carefully provided and 
managed; the hazard of panics, precipitating demands for 
coin, concentrated on a few points and a single fund ; the risk 
of a depreciated, and depreciating and finally worthless, paper 
money ; the immeasurable evils of dishonored public faith 
and national bankruptcy — all these are possible consequences 
of the adoption of a system of government circulation." 
These possible disasters so much outweighed the probable 
benefits of the plan, that he opposed the adoption of it. 

The principal features of the second plan were, first, the 
making of notes bearing a common impression, and authen- 
ticated by a common authority ; second, their redemption by 
the associations and institutions to which they should be 
delivered for issue; and, third, the securing of them by a 
pledge of United-States stocks and an adequate amount of 
specie. 

" If this plan should be adopted," said the secretary, " the 
people in their ordinary business would find the advantages 
of uniformity in currency, of uniformity in security, of effectual 
safeguard — if effectual safeguard is possible — against deprecia- 
tion, and of protection from losses in discounts and exchanges ; 
while, in the operations of the government the people would 
find the further advantages of a large demand for government 
securities, of increased facilities for obtaining the loans required 



200 FINANCIAL HISTORY OF THE UNITED STATES. [18G1. 

by the war, and of some alleviation of the burdens on 
industry through a diminution in the rate of interest, or a 
participation in the pi-ofit of circulation without risking the 
perils of a great money monopoly." 

The secretary possessed " the greatest confidence in this plan, 
because it had the advantage of recommendation from experi- 
ence," referring particularly to the trial of the plan in the 
State of New York. 

How long the secretary may have been maturing his opin- 
ions on this subject we do not know, but in August, 1861, 
within a month after the first battle of Bull Run, and when 
the sanguine hope previously entertained of a speedy ending 
of the war had faded away, O. B. Potter, of New York, sent 
a letter to Mr. Chase, containing a plan of a national currency, 
and which was subsequently printed. 

His plan was to authorize banks and bankers in the loyal 
States to secure their bills by depositing with a superintendent 
appointed by the government, United-States stocks at their 
par value, in the same way that the banks and bankers in 
New York at that time secured their circulation by depositing 
New- York State and United-States stocks with the State 
comptroller at Albany.^ This plan, therefore, provided for a 

' The National Currency : its Origin. In setting forth his plan, Mr. 
Potter remarked : "To do this, it is necessary only for the government to 
authorize and appoint a superintendent connected with tlie treasury, whose 
duty it shall be to receive from duly authorized banks and bankers within 
loyal States, United-States stocks in sums of not less than say $200,000 from 
one party, and hold the same as security for an equal amount of bills, to be 
properly stamped and signed by such superintendent, and delivered to the 
depositing bank or banker. This mark or stamp and signature of such super- 
intendent to guarantee to the liolder of the bills issued that tlie same are 
secured by United-States stocks deposited with and held by the govern- 



1861.] THE NATIONAL BANKIXG SYSTEM. 201 

national circulation resting on national bonds issued by a 
natioual officer to banks and bankers governed by State 
authority. Their parentage and discipline were not to be 
changed. 

The bankers of New York having heard that Mr. Chase 
would recommend a national banking system in his annual 
report, James Gallatin prepared and read to him " an exposi- 
tion of the futility of resorting to such a scheme, and explained 
how it -^vould fail to yield to him the supply of capital ^\d^ch 
he required." * The banks had not yet fully learned how Mr. 
Chase regarded their advice ; their doubt, however, was solved 
within a few months. 

The Xew-York plan, on which the national banking system 
was largely, though not wholly, based, had been in operation 
in that State since 1838. The germ of such a system may be 
found in the letter of Curtius, addressed to the secretary of the 
treasury in 1816, on the subject of a national currency. He 
recommended the formation of a national bank whose capital 
should consist of " public responsibilities to an amount com- 
mensurate with the circulating medium essential to the trans- 
fer of property, that certain revenues should be hypothecated to 
discharge the interest, and that Congress should grant lands as a 
collateral security. As the notes of this institution," continued 
the writer, " are intended to represent the circulating medium, 
the amount of capital should be predicated on an estimate of 
our present circulation, and by the adoption of public stock, 

ment ; and that in case the same shall fail to be redeemed by the bank or 
banker issuing them, then, on due demand and protest, such superintendent 
will sell, after proper notice to the bank or banker, and apply to the redemp- 
tion of said bills the stocks held to secure the same." 
1 16 Bank. Mag., p. 627. 



202 FINANCIAL HISTORY OP THE UNITED STATES. [18G1. 

with the hypothecation of real property, to stand as a collateral 
guarantee, there will be an apparent and sure evidence of 
responsibility and representative value." In 1827 the idea 
of Curtius was wrought into a better form by the Rev. Dr. 
MoVickar, and sent to a member of the New- York Legislature. 
After setting forth the evils attending banking at that time, 
and the nature of the business and of credit, he proposed a 
banking system, the first three provisions of which are the 
following : " 1. Banking to be a free trade, in so far as that 
it may be freely entered into by individuals or associations 
under the provisions of a general statute. 2. The amount of 
the banking cajiital of such individual or association to be 
freely fixed, but to be invested one-tenth at the discretion of the 
bank, the remaining nine-tenths in government stock, whereof 
tlie bank is to receive the dividends, but the principal is to 
remain in pledge for the redemption of its promissory notes, 
under such securities as to place the safety of the public 
beyond doubt or risk, the stock being made untransferable, 
except by the order of such court as shall be made cognizant 
of these subjects with a view to wind up the affairs of the bank. 
3. The promissory notes of such individual or association to 
bear upon their face the nature and amount of the stock thus 
pledged, together with the usual signatures, and in their amount 
never to exceed the amount of their pledged stock, under the 
penalty of the individual or firm being declared bankrupt." 
Although the plan did not meet with a favorable reception at 
Albany, four years afterward, in 1831, some fruit appeared in 
IMaryland. A bill was introduced into the Legislature, pro- 
viding for free banking. The license, therefore, was to be 
obtained from the chancellor of the State. The applicant was 
to exhibit a list of his property, which was to be vested in 



1868.] THE NATIONAL BANKING SYSTEM. 203 

trust in a form selected or approved by the chancellor. The 
deed of trust was to be drawn " in such terms, and with such 
provisions as he may deem most proper for the security of the 
object of said trust." The chancellor having approved the 
deed, the applicant was to receive a certificate from the clerk 
of the coimty court of the deposit of the same for record. 
The next step was for the chancellor to determine the value 
of the property described in the instrument, and, having done 
so, he could authorize the applicant to issue notes not exceed- 
ing in amount one-fourth of the value of such property. 
Subsequently, in 1834, several members of a local bank con- 
vention, held in Baltimore, favored the establishing of a bank, 
with three-fourths of the capital permanently invested in 
mortgages. A copy of the ^Maryland bill was transmitted to 
a member of the New-York Senate in 1837, and the next year 
the banking system was adopted, and which, after a trial of 
twenty-five years, was to be more highly developed and serve 
a national purpose. 

A bill was prepared by the Committee of Ways and Means, 
embodying the views of Mr. Chase. The work of preparation 
mainly fell on Mr. Spaulding, Mr. Hooper and other mem- 
bers rendering valuable assistance. The banking laws of the 
States were thoroughly examined by competent persons, and 
utilized. Massachusetts had recently enacted a free banking 
law, which contained improvements on the New York 
original, some of which were incorporated in the national 
bank bill. Other parts were taken from the banking laws of 
Ohio and Illinois, which were the fruit of much study and 
experiment. The provisions relating to the reserve fund were 
drawn largely from the banking law of Louisiana. The bill, 
therefore, was a mosaic, though containing more of the New- 



204 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

York banking law than any other. At a meeting of repre- 
sentatives of banks and boards of trade, held in Washington 
early the next year to consult with Mr. Chase, several propo- 
sitions were formulated, and among these "that Congress 
should enact the national currency bill, embracing the general 
provisions recommended by the secretary in his annual report." 
The measure was generally discussed by members of Congress, 
newspapers, bankers, and others, but other business pressed so 
heavily that even a notice in July to print extra copies was 
laid on the table. Shortly afterward, Mr. Stevens, the chair- 
man of the committee, reported against the bill. The gov- 
ernment having authorized the issue of $300,000,000 of legal 
tenders, the consideration of the subject was deferred for the 
session. 

At this time public opinion was divided, and opposition to 
the plan was not confined to the banks, nor to interests allied 
with them. In an able and elaborate report on the finances 
and resources of the country, adopted by a very respectable 
New York society in January, the following criticism was 
expressed : " Were this plan of banking adopted, the circu- 
lating currency of the Country would be irregular in value at 
different points, for remote banks would not redeem at par at 
the centre of exchanges. Not only so, but it would be con- 
stantly varying in amount, producing perpetual changes in 
values, for marketable value depends on the quantity of circu- 
lating medium. Each bank would sell its security and call 
in its circulation, whenever the high price of United-States 
stocks, or the wish of the OAvner might suggest the course. 
And again, from other causes, large amounts of bank-notes 
would, at different times, be thrown out for circulation, and 
thus, inevitably, would perpetual change in the quantities of 



1863.] THE NATIONAL BANKING SYSTEM. 205 

circulating medium perplex and embarrass commercial trans- 
actions." ^ 

In his next report Mr. Chase strenuously urged the estab- 
lishing of the system. He said it seemed difficult to conceive 
of a note circulation which would combine higher local and 
general credit than this. After a few years no other circu- 
lation would be used, nor could the issues of the national 
circulation be easily increased beyond the legitimate demands 
of business. Every dollar of circulation would represent real 
capital actually invested in national stocks, and the total 
amount issued could always be easily and quickly ascertained 
from the books of the treasury. These circumstances, if they 
might not wholly remove the temptation to excessive issues, 
would certainly reduce it to the lowest point, while the form 
of the notes, the uniformity of devices, the signatures of 
national ofificers, and the imprint of the national seal authen- 
ticating the declaration borne on each that it was secured by 
bonds which represented the faith and capital of the whole 

^ " It is true that in the State of New York this system has worked well, 
but it is equally true that in Illinois it has been a failure ; and it would have 
been a failure in that State on the first financial pressure, had no rebellion 
occurred. The larger part of the banking capital of the State of New York 
is in the city of New York, and the centre of exchanges being in the city, 
capital concentrates there. The city banks have very few bills in circula- 
tion, and the result is, that the country banks, which depend for profits on 
their circulation, issue that circulation without fear, as the city banks are 
always ready to redeem, and, for a reasonable time, hold the bills of the 
banks of which they keep the accounts, charging interest on the debit bal- 
ances, however small, and allowing no interest on credit balances, however 
large. Excepting in New England, there is no such commanding centre 
where redemptions are made when needed. As a system for the entire 
Union, we can draw no proper parallel from the success of the plan in New 
York." — Report of Oeor/raphiccd and Statistical Society, p. 5. 



206 FINANCIAIj history of the united states. [1868. 

country, could not fail to make every note as good in 
any part of the world as the best-known and best-esteemed 
national securities. Another advantage mentioned by the 
secretary was the reconciliation, as far as practicable, of 
"the interests of existing institutions with those of the 
whole people." 

Mr. Chase's recommendation was received with general 
favor.^ Nor did the banks disagree with him. Said an ex- 
cellent authority : " The sound and conservative banks, who 
look to the safety, the uniformity and the stability of the 
paper currency of the country as essential to the prosperity 
and permanency of commerce and finance, consider the pro- 
posed change as desiraljle for the true interests of the people. 
In this, however, the banks properly exclude the idea of profit 
to individuals, which now arises from the issue of paper 
money ; but iu view of the lamentable evils which have 
hitherto marked its excesses and abuses, they look at the 
subject in its broader and national aspects, and conclude that 

'President Lineoln strongly favored the national banking system. In 
his second annual message, after declaring the desirability of returning to 
specie payments at " the earliest period compatible with due regard to all 
interests concerned," and inquiring whether there was any other mode in 
which the necessary provision for the public wants could be made, and the 
great advantages of a safe and uniform currency be secured, answered, " I 
know of none which promises so certain results, and is, at the same time, so 
unobjectionable, as the organization of banking associations, under a general 
act of Congress well guarded in its provisions. To such associations the 
government might furnish circulating notes on the security of United- 
States bonds deposited in the treasui-y. These notes, prepared under the 
supervision of proper officers, being uniform in appearance and security, 
and convertible always into coin, would at once protect labor against the 
evils of a vicious currency and facilitate commerce by cheap and safe 
exchanges." 



1868.] THE NATIONAL BANKING SYSTEM. 207 

the interests of the whole coiintiy and the whole people are 
paramount to those of individuals and corporations."^ The 
favoring wind of public opinion had been blowing more and 
more strongly ever since ]Mr. Chase made his first recom- 
mendation. 

A bill was introduced into the House by Mr. Hooper, a 
member of the Committee of ^Yays and Means, and reported 
adversely the next day ; at the same time, however, they 
reported fa%'orably on another bill which had received their 
consideration. Subsequently INIr. ISIoorhead introduced a third 
bill, but no action was taken on either ; in the meantime INIr. 
Sherman introduced one into the Senate, which was reported 
from the Finance Committee with some amendments, thor- 
oughly debated and passed, and sent to the House on the 12th 
of February." The principal speech in favor of the bill was 
made by ]Mr. Sherman, and ^Nlr. Collamer, of Vermont, was 
the strongest opponent. Mr. Sherman first stated the objec- 
tions to issuing more United-States notes. The danger of 
over-issuing them was pressing on the country, and their 
effect in inflating values " was felt by every one." The mere 
introduction of a bill in the House to authorize the issue of 
S-300,000,000 additional United-States notes had operated like 
magic.^ On the day this was done gold commanded a pre- 
mium of thirty-six and a half per cent. The next day it rose 

' 17 Bank. Mag., p. 573. 

' The Finance Committee reported favorably by a bare majority of one, 
Senator Elce, of Minnesota, at the request of Mr. Chase, giving his vote in 
favor, though voting against the bill on its passage in the Senate. 

' " In one week it changed values over ten per cent, and in three or four 
weeks it changed them nearly thirty per cent. The proposition of the 
Senate to check this over-issue at once reduced it some four or five per 
cent." — Senatoe Sheeman, Speeches, p. 61. 



208 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

to thirty-eight ; withiu three days it rose to forty-one ; on the 
15th of January, six days afterward, it rose to forty-eight and 
a half. '' It did not suffer a decline until there was a dispo- 
sition evinced in the Senate to check the over-issue of this 
kind of paper money." Nor were the people slow in discoNcr- 
ing the opposition of the Senate. Such -was the effect of even a 
proposed over-issue of United-States notes. Moreover, there 
was no mode of redeeming them, and they could " only be ' 
used during the war." Doubtless, most persons shared this 
belief. " The very moment that peace comes," continued the 
senator, " all this circulation that now fills the channels of 
commercial operations will be at once banished. They will be 
converted into bonds ; and then the contraction of prices will 
be as rapid as the inflation has been. The issue of govern- 
ment-notes can only be a temporary measure, and is only 
intended as a temporary measure to provide for a national 
exigency." 

Another objection to issuing more government-notes was the 
using of them as a basis for bank issues.^ Since they had 

' " It is difficult, under the operation of our system, for the secretary of 
the treasury to carry on the large operations of the government necessary 
to convert notes into bonds. The first issue of $60,000,000 of notes were 
issued with the right of being converted into six-per-cent twenty-years' 
bonds, and with the privilege of being paid for duties in customs. They 
are now far above par, and are hoarded. This is the chief reason given 
why it is necessary to issue a greater amount. Wliy are they hoarded? 
Simply because they have certain privileges and certain advantages which 
tlie bank paper of the United States has not. The consequence is, the 
government of the United States is either compelled to receive this bank 
paper, in violation of the sub-treasury law, or it is compelled to issue a 
new emission of paper money, and thus depreciate and break down the 
■whole. If Congress allows the issue of the paper money provided for in 
this bill, what is the consequence ? The banks will take it, and issue 



1863.] THE NATIONAL BANK IXG SYSTEM. 209 

beea declared a legal tender, the bank circulation had increased 
from §120,000,000 to §167,000,000.» The banks sold their 
gold at a premium, and put legal-tender notes in its place to 
redeem their own circulation. The senator maintained that 

other paper money on the basis of it. Most of their charters require 
tliem to keep one-third specie in their vaults ; but under the operation 
of existing laws instead of that specie, they will now keep one-third 
paper money. Every new issue of treasury-notes is only a bid for a new 
inflation by the banks, and thus the better money of the United States is 
hoarded and laid away, and the paper money which is issued on the credit 
of it is thrown on the country, producing inflation and derangement of our 
monetary system." — Senatok Sheeman, Speech in Senate, July 4, 1862. 
Robert J. Walker, in reviewing our finances^ and Mr. Chase's report in 
December, 1862, said : " Just in proportion as the issue of treasury-notes be- 
cnmes redundant and depreciated, will the bank circulation redeemable in 
such notes augment and depreciate also. This is the law of bank circula- 
tions as now forced upon us by Congress. If this policy is adopted by Con- 
gress, an enlarged issue made of treasury-notes, and the plan of the secretary 
di.scaided, our bank and treasury-note circulation, with the war continued, 
will very largely exceed one billion of dollars before the close of the next 
fiscal year, and both will be depreciated much more than sixty per cent. 
Thus, if we should enlarge our issues of legal demand treasury-notes to 
$•500,000,000, and these be made the basis of bank issues, in the ratio of 
three to one, our total paper circulation would be §2,000,000,000, such 
treasury-notes inflating the bank issues, and both depreciating together. 
The result would be general insolvency and repudiation." 

' " When you issue your paper money now, as you are compelled to issue 
it, it becomes the basis of other issues by the banks, and the inflation 
which you are compelled to give becomes a double inflation from its conse- 
quences on the banks of the United States. When the government of the 
United States issued $150,000,000 of notes, if there had been no depreciated 
bank paper money in the United States, that $150,000,000 would this 
moment have been at par with gold ; but the issue by the government wa-s 
made the basis of other issues by local banks."— Senatob Shekman, 

Speech in Senate, July 4, 1862. 

14 



210 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

it would be very easy to prove that " during war local banks 
are the natural enemies of a national currency. Whenever 
specie payments are suspended, the power to issue a bank-note 
is the same as the power to coin money. If you give to an 
individual or a corporation the power to issue his note as 
money at a time when he is not restrained by the necessity of 
paying it iu gold and silver, you give him practically the power 
to coin money." The banks in the United States were imitat- 
ing the Bank of France after it suspended specie payments, 
and whose conduct was severely censured by Napoleon amid 
the terrific excitement of his Austerlitz campaign. He wrote 
to the minister of the treasury that the bank was " coining 
false money." 

No one could deny this statement. The legal-tender notes 
were lawful money, and the banks could hold them instead of 
specie for the purpose of redeeming their circulation. The 
treasury-notes which had been issued from time to time for 
fifty years until 1862 were not a legal tender, and could not 
be used to redeem bank-notes. Congress, when author- 
izing the issue of legal-tender notes, prepared two ways for 
inflating the currency — one way was by the act of govern- 
ment, and the other by that of the banks. Congress rendered 
bank-note issuing far easier than ever before.* Considering 
the facility afforded for bank-note expansion after the issue of 
legal-tender notes, the banks merit some favorable regard for 
not expanding more rapidly. Nevertheless, the fear that they 
would issue more notes, and thus accelerate the diminishing 
value of the entire circulating mediuni, moved many to favor 

' " The increase in one year after suspension of specie payment was $56,- 
000,000. Believed of all liability to redeem the evident tendency of tlie 
banks was to still greater expansion." — Com])lroller's Report, 1866, p. 67. 



1S63.] THE NATIONAL BANKING SYSTEM. 211 

a policy of confining the issue of paper money to the govern- 
ment, or to banks amenable to national regulation.^ 

In a speech delivered at the previous session, Mr. Sherman 
had described the " radical objections to the present banking 
system." At that time one thousand three hundred and 
ninety-six banlvs existed in twenty-nine States and one terri- 
tory. " Their systems of banking," he said, " are as diverse 
as anything can possibly be. We have a complex system of 
bank-notes. The ordinary bank-note reporters and detectors 
contain an infinite variety of descriptions to tell the value of a 
bank-note, and whether it is counterfeit. The loss by counter- 
feiting, and the loss by bad notes of various kinds in tliis 
country, is estimated by gentlemen who are engaged in the 
business as nearly equal to the interest on the whole circu- 
lation. The people, therefore, are not only compelled to use 
this money, and substantially give to the banks a profit of the 
interest on the whole circulation, but in addition to that they 
fully lose $9,000,000 in the form of defaced notes^ counterfeit 
notes, etc. 

" Every year more or less of these banks break. There is 
no stability about them. They have no common bond of 
organization ; any important event that disturbs the money 
market of the world makes a greater flutter among them tlian 

•When the bill for authorizing the second issue of 1150,000,000 lesal- 
tender notes was before the House, Mr. Hooper, of Massachusetts, inquired 
of a member, which he considered had the greatest effect in depreciating 
the currency, " the unrestrained issue of notes of suspended banks, I mean 
banks which have suspended specie payment, and upon whose issue there 
is no kind of restriction, or the issue of these government-notes, the depre- 
ciation of which is limited by the convertiliility which they carry, into the 
bonded debt of the country, payable in specie, interest and princijial." — 
Cong. Globe, June 19, 1862. See, also, 17 Bank. Mag., 485. 



212 FINANCIAL HISTORY OP THE UNITED STATES. [1868. 

a shot among a bevy of partridges. The uncertair rate of 
exchange between the different States grows out of the multi- 
tude and diversity of the banks. The bank paper of States 
adjoining each other has varied in value as much as one year's 
interest of money." 

Much was expected of the national banking system. Be- 
side convertibility of the notes, and uniformity in size, Mr. 
Sherman maintained that if the system were established, a 
market would be created for the bonds of the government ; 
the national bank-notes would furnish a medium for absorb- 
ing those of the State banks ; the banks would be safe and 
convenient depositories of the public money ; they would also 
form a community of interest between the stockholders, the 
people, and the government ; and, finally, the system would 
promote a sentiment of nationality. 

Mr. Collamer opposed the bill in an elaborate speech. He 
first showed what suffering would be caused in settling the 
business of the State banks. " It will be found that the people 
will not break up their present system of banking, interwoven 
as it is with all their transactions, bound up as their business 
life is with it, to establish banks under this bill, and they will 
never buy United-States stocks for this purpose." He 
questioned the right of the government to impose a tax so 
great on the State banks as to drive them out of business, — a 
provision contained in another bill under discussion by the 
House. He questioned the right of the government to establish 
corporations in States and territories entirely independent of 
their power of visitation. He also objected that by putting 
capital into these banks it would be removed from State tax- 
ation. He questioned the propriety of "undertaking as a 
nation to say that we would be responsible for the ultimate 



1868.] THE NATIONAL BANKING SYSTEM. 213 

redemption of these bills by the securities that are deposited." 
He then showed the danger arising from the system as a 
political agency. The bill provided for the appointment of a 
comptroller and other officers and agents. The secretary of 
the treasury was to be endowed with authority to make some 
of the banks depositories of the public revenue, and to dis- 
tribute the $300,000,000 of stock which could be put into 
these institutions. "If a secretary of the treasury can be 
furnished with these powers, and chooses to use them," eaid 
the senator, " he must be a very bungling politician if 
he cannot make himself president any day." Other objeo- 
tions were raised by him, but the most fully discussed feature 
of the law was the proposed tax of two per cent on their 
capital. 

Senator Harris, of New York, when offering an amend- 
ment granting authority to the State banks to receive circula- 
tion under their charters, said : " The banks in the State of 
New York can, I believe, be induced, without surrendering 
their charters as State banking associations, to take out circu- 
lation under the provisions of this bill, but I do not suppose 
that a sing-le banking; institution in the State of New York 
would ever be induced to surrender the privileges it derives 
under the State laws, and become an association organized 
under the provisions of this Act." 

James Gallatin, of New York, wrote to Senator Fessenden 
during the debate : " In our own State, as well as in the West, 
the system of banking on public stocks has proved delusive in 
seasons of great depression in the prices of such stocks, being 
less reliable than banking upon real business mercantile paper 
(not accommodation) at short dates ; and the banks dealing in 
the latter in this city having been compelled to protect the 



214 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

circulation of the public stock banks in order to save the latter 
from bankruptcy." 

The debate in the Senate continued until the 12th of Febru- 
ary, when the bill passed by the very close vote of twenty- 
three to twenty-one. 

The debate in the House was brief, for the subject had been 
debated when the $900,000,000 loan-bill was before that body. 
The session was rapidly nearing the end, and many important 
matters required consideration. The discussion opened with 
a speech by Mr. Spaulding, of New York, followed on the 
same side by Mr. Feuton, also of that State. He remarked 
that in November of the previous year the circulation of the 
banks in the loyal States was $167,000,000. To redeem this 
the banks held about $40,000,000 of State securities, leaving 
$120,000,000 inadequately secured. In only nine of the 
thirty-four States had the principle of securing payment of the 
bank circulation been adopted. 

As the proposed system was not compulsory on existing 
banks, it would not be regarded with the jealousy of a purely 
rival scheme, and an intelligent consideration of their own 
interests, and those of the government and the people, would 
lead the banks to modify any contemplated opjiosition ; and 
even if their individual profits and the present modes of busi- 
ness were somewhat injuriously aifected, the same liberal and 
devoted patriotism in support of the public credit heretofore 
exhibited would insure their acquiescence in all pubhc 
measures deemed necessary to preserve that credit. 

One of the gravest fears of the New- York banks concern- 
ing the measure was depreciation on the State bonds held 
by them to secure their circulation if required to replace 
them with bonds issued by the government. If they were 



ISes.) THE NATIONAL BANKING SYSTEM. 215 



driven out of the State system by the taxation of their cir- 
culation, or in other ways, it would be necessary to oro-auize 
under the national system or retire from business. In either 
event their bonds would be sold, and they feared the conse- 
quences. Mr. Fenton said, in reply to this objection, there 
was reason for believing that in any event the stocks issued 
by his State would be required " for investment on private 
and foreign account, and suffer no depreciation." But sup- 
posing they might, this was of small moment compared with 
their greater interest in upholding the credit of the govern- 
ment. At that time the New- York banks held $12,000,000 
of United-States bonds as part security for their circulation 
and $136,000,000 more of these bonds taken for loans and 
advances to the government. 

The principal speech against the bill was delivered by Mr. 
Baker, also of ISew York. Many objections were stated, one 
of which was that the bill did not provide a central place for 
the redemption of the notes. Each bank was to redeem its 
circulation at the place of issue. The New- York banking 
system provided for the redemption of all bank-notes in the 
chief city of the State. When the previous safety fund system 
existed there, bank-notes were from one-eighth to two per 
cent discount, varying by their distance from the place of 
redemption. "Such would be the case," said Mr. Baker, 
" with the notes which we propose to issue under this system 
in each individual State, but the discount upon them woidd be 
far greater in other States and at distant points from their place 
of issue. To remedy this evil, and make this currency of 
uniform value throughout the United States, it is absolutely 
necessary that these associations should be compelled to 
redeem their notes at their counters, at the commercial 



216 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

centre of each State in which they are located, and also at 
New York." 

Another objection stated by him was the requiring of the 
banks to keep on hand twenty-five per cent of their circula- 
tion and deposits in lawful money .^ If the banks should 
keep legal-teuder notes for this purpose, and the legal-tender 
Act should suddenly be declared unconstitutional, the exposed 
condition of the banks would be apparent. 

In a speech prepared by Amasa Walker, of IMassachusetts, 
though not delivered,^ he urged the adoption of the proposed 
system, first, because the notes would be uniformly current 

' " The States generally allowed banks to issue notes without reference to 
the amount of specie in their, vaults. The only exceptions were the States 
of Louisiana, which required a reserve of thirty-three per cent upon circu- 
lation and deposits, and Massacliusetts, which, after 1858, required a reserve" 
of fifteen per cent. No other case is recollected where any definite propor- 
tion between specie and immediate liabilities was established by law." — 
Amasa Walkek, 1 In. Rev., p. 213. 

' 17 Bank. Mag., p. 833. " Could I have my own wishes," Mr. Walker 
said, " I should, as I have before insisted, instead of creating a rival system, 
lay a tax of three per cent, semi-annually, on all present bank circulation, 
drive it entirely out of existence, and fill its place with the legal-tender 
notes of the government ; so that, on the return of peace, and specie pay- 
ments by the government and the banks, there would be no credit currency 
issues, except those made by the national currency, which, by suitable 
limitation, might always be kept at par with gold. I would thus establish 
one kind of currency instead of three, and that the cheapest and best we 
could possibly have. This arrangement, together with the legal provision 
that the banks might issue specie certificates in the form of notes for specie 
actually in their possession, would furnish them and the public with all the 
currency they could possibly need, and one that would never be exposed to 
any fluctuation except that which naturally arises from the operation of 
the laws of trade, and which can never be violent or really injurious to any 
community or State." 



1863.] THE NATIO^TAL BANKING SYSTEM. 217 

everywhere, and would therefore equalize exchanges between 
diiferent sections of the country ; secondly, because the system 
would secure to the people by the tax imposed on the banks a 
share of the large profits on their notes. Again, it would 
greatly reduce the danger of counterfeit and spurious 
emissions/ They would be brought directly and uniformly 
under the control of national legislation, and by thus 
identifying the interests of the moneyed institutions with 
the credit of the national government, strength and stability 
would be given to both. Finally, millions of capital would 
be diverted from the East to the West, where it would be 
more actively and profitably employed for business purposes.^ 

^ At that time there were seven thousand kinds of bank-notes in circu- 
lation. 

^ Perhaps the last noteworthy argument against the national banking 
system was make by Mr. Van Dyck, the superintendent of the banking de- 
partment of New York, at the beginning of 1864. He remarked that " the 
first obvious effect of the national system must be the inordinate multiplica- 
tions of banks of small capitals throughout the country. The slightest famili- 
arity with the location of these institutions must enforce the conclusion that 
they are not established in accordance with the requirements of legitimate 
business, adequate to the support of a bank, but that they are designed merely 
as conduits through which the circulation received from Washington is to 
flow out upon the community." The idea had been inculcated that the 
notes thus sent forth possessed all the attributes of a currency issued by the 
nation itself, that they would maintain an illimitable round of circulation 
and their " putative fathers " would never be called on to fulfill the promise 
of payment until Columbus discovered another continent, or De Soto 
called at the bank on his way up the Mississippi. Under these seductive 
influences, aided by the hope of becoming depositories of the public funds, 
Mr. Van Dyck regarded a raiiid increase of the banks not improbable, and 
that a large accession to the Irredeemable currency would " serve further 
to illustrate the problem of the rising properties of gold, and the sinking 
properties of paper." — 18 Bank. Mag., p. 817. 



218 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

The bill passed by a vote of seventy-eight to sixty-four on 
the 20th of February. ]\Iauy were iu favor of establishing the 
national banliing system because they believed it would be a 
great improvement on the State systems.^ The people, if 
gaining much, had also suffered much from them. Inside 
and outside Congress opposition to these institutions was 
strong and increasing.^ Notwithstanding the assistance they 
had rendered to the government, not a few persons ascribed 
base motives to them, and charged them with making large 
profits from their operations with the government. Although 
the fact was otlierwise, hostility to them was "widespread. 
Mr. Chase sought to intensify it, and particularly in his annual 
report for 1863, wherein he boldly stated that " much of the 
greater part of the rise of prices not accounted for by the sud- 
den war demaud for things, as well as much the greater part 
of the diflFerence between notes and gold, was attributable to 
the large amount of bank-notes yet in circulation. Were 
these notes withdrawn from use it is believed," he maintained, 
" that much of the now very considerable difference between 

■ ' " At present, Illinois and the States north and west of her have but 
few hanks. Now, as a matter of absolute certainty, these States -will pro- 
ceed to establish banking institutions under their own laws. They may 
not do this at present. Illinois, for example, has been so scathed and 
plundered by credit money banking, that she may be slow in creating 
another such system ; but she will do it, because the clamor for banks, and 
the mistaken views of the masses in regard to paper currency, will compel 
its legislature to create new banking institutions. So of all the States of the 
West. But pass this bill and we put an end to the formation of these 
new State banks ; because such are the facilities which this law gives, and 
such the character of the currency it establishes, that it will have the pre- 
ference over any that can be created by State legislation." — Amasa 
Walker, 1 In. Rev., p. 213. 
'^ See Watts's Speech, Cong. Globe, June 23, 1862. 



1363.] THE NATIONAL BANKING SYSTEM. 219 

coiu and Uuited-States notes would disappear." This state- 
ment is completely saturated with error. The " difference 
between notes and gold -w as attributable," not so much to " the 
large amount of bauk-uotes " as to the larger amount of gov- 
ernment circulation, for the reason that the former was taken 
just as readily as the other and was not in the least depreci- 
ated, measured by the government paper standard. If ]Mr. 
Chase supposed that the State bank circulation affected prices 
differently from the government-notes when both circulated at 
the same value, the distinction was purely imaginary, and his 
evident endeavor to make the public believe that the banks 
were responsible for the rise in prices, except as above ex- 
plained, was to swell the current of popular sentiment more 
strongly against these institutions. Why did he not put his 
statement the other way, that if legal-tender notes had not 
been issued, "no difference between gold and notes " would 
have occurred. This statement would have contained far more 
truth than the other, but would have not served his purpose. 
The most important provisions of the law were that five or 
more persons could form a banking association, and on deposit- 
ing §50,000, or a larger amount, of any kind of govern- 
ment interest-bearing bonds with the United-States treasurer, 
could receive circulating notes to the amount of ninety per 
cent of the current and par value of the bonds deposited. 
These notes were to be receivable for all government dues 
except duties on imports, and payable on government debts 
except for interest on its bonds. In lieu of all taxes on circu- 
lation or bonds, the banks were to pay semi-annually one-half 
of one per cent on their circulation,' and they were to conform 

' On the 5th of January, 1863, Mr. Sherman introduced a bill for the levy 
of a tax of two per cent on the circulation of all bank-bills, and a tax of ten 



220 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

to the laws of the States in fixing their rates of interest. They 
were to keep on hand, in lawful money, at least twenty-five 
per cent of their notes and deposits, and were to redeem their 
circulation at the place of issue. The amount to be issued 
was fixed at $300,000,000, one-half of which was to be issued 
to banks in States and territories, determined by their popula- 
tion, the other half was to be distributed with regard to the 
existing bank capital, business, and resources of each State. A 
bureau of currency %vas to be established in the treasury ' 
department, and administered by a comptroller and proper 
subordinate officers. He was to be appointed by the Presi- 
dent, on the recommendation of the secretary of the treasury, 
with the consent of the Senate, and hold his office for five 
years. 

Although the system was rapidly growing in public favor, 
heavy streams of criticism were poured on the law from 
various points. Some persons criticised the law in detail, 
others as a whole. ]\Iany persons of position and experience 
maintained that if more paper money was wanted the govern- 
ment ought to furnish it instead of banking institutions. This 
opinion was held by the committee of the New- York Oearing- 
house, who were appointed to examine the law. " If," said 
the committee, " more currency is required for the legitimate 
business of the country, why should not the government avail 
itself of the opportunity to issue a further amount of legal- 

per cent on all fractional currency under one dollar issued by corporations 
and individuals. Three days afterward he delivered a lengthy speech on 
this bill, in which he showed particularly the defects of State banking, and 
the expediency and justice of the proposed tax. The main purpose of the 
bill stated, in his own language, was "to induce the banks of the United 
States to withdraw their bank paper, in order to substitute for it a national 
currency, or rather the national currency we have already adopted." 



1863.] THE NATIONAL BANKING SYSTEM. 221 

tender notes ? They do furnish a currency of uniform value — 
less the expense of transportation — in every part of the Union. 
Whereas, the national bank currency is not lawful money, 
and, being payable in diiferent parts of every State, must be 
subject to the laws of exchange, which are as infallible as the 
laws of gravitation, and necessitate a discount on bank-bills 
payable at a distance from business centres, even when redeem- 
able in specie. Paper currency, merely, is poor enough, at 
the best ; why, then, should the government be willing to give 
the people an inferior paper currency when it commands a 
superior one ? " 

The committee did not state that, in their judgment, the 
present issue of legal-tender notes was in excess of the wants of 
government and requirements of business. They were aware 
that the average amount of legal-tender notes held by New- 
York City banks, for several months past, had not exceeded 
twenty millions of dollars, although those notes constituted 
the reserve or medium of settlement in place of specie. 
Had this currency been superabundant it would have shown 
itself in large accumulations at the principal cities — New 
York, Boston, and Philadelphia. 

" Various causes combined had created an increased demand 
for currency, and the following was regarded as among the 
principal ones, namely : 1. The withdrawal of specie from com- 
mercial and mercantile transactions ; 2. The advance in prices 
of all commodities ; 3. The shortening of credits in every 
branch of basiness ; 4. The large payments to the army and 
navy, and other war disbursements. This leaves out of the 
account the whole western country, which, by the annihila- 
tion, two and a half years ago, of its banking institutions 
(founded on State stocks), was completely emptied of paper 



222 FINANCIAL HISTORY OP THE UNITED STATES. [1863. 

currency, and had to be filled up anew, not only to the measure 
of its former fullness, but far beyond it ; for tlie United States 
has been buying largely of almost all the products of the West, 
and not only the United-States government, but Europe, also, 
has been a purchaser, and all has been paid for in ' legal tend- 
ers.' Indeed, the demand from the "West for these notes is 
constantly increasing, being larger this autumn than ever 
before. This currency the people are satisfied with." ^ Another 
bank oificer, early in the year, had said that " in view of the 
debasement of the circulating medium, and of the entire absence 
of all ordinary power to restrain the expansion, it was for the 
government, with a bold hand, to seize the control of the 
whole currency of the country as a war measure." This argu- 
ment was more strenuously urged against the adoption of the 
law than any other. 

The banks organized more rapidly at first in the "West than 
in the East." One reason was because the charters of the 
State banks of Ohio and Indiana, and of other banks, were 
soon to expire. Hugh McCulloch, president of the bank of 
the State of Indiana, an important institution which he had 
managed with marked success, was appointed comptroller of 
the currency. Though at first opposed to the national bank- 
ing system, his efficiency in administering his office was 
quickly recognized. When he made his first report at the 
close of November, 1863, one hundred and thirty-four banks 
had been organized, fourteen of which were in New England, 

^ Report on the National Bank Currency Act, p. 17. See, also, A Eeply 
to this Eeport by "A Member of Congress," 1804. 

' The First National Bank of Springfield, Mass., was the first association 
to become a body corporate, Feb. 20, 1863, but the First National Bank of 
Philadelphia was the first authorized to begin business, June 20, 1863. 



1863.] THE NATIONAL BANKING SYSTEM. 223 

sixteeu in Xew York, t\\'entY iu Pennsylvania, twenty in 
Indiana, thirty -eight in Ohio, SQven in Illinois, six in Iowa, 
and four each in INIichigau and Wisconsin. The opinion was 
rapidly spreading that even in the Eastern States the national 
system Avould soon supersede the State systems of banking. 
The issue of national bank-notes was delayed, and none 
appeared until the 21st of December. 

The comptroller's first instruction required the banks in 
organizing to designate themselves as first, second, etc., national 
bank of the place iu which they were located.* The State 
banks, whose good names were worth as much to them as a 
good character to a man, were unwilling to throw away so 
valuable a possession. Though appeals were made to the sec- 
retary, he was inflexible. " This arbitrary rule," wrote James 
Gallatin, " is so destructive to that individuality which gives 
rise to, and is a reward of enterprise and skill, tliat it recalls 
the edicts of ' uniformity ' and ' conformity ' of benighted 
countries and times. Among savage or barbarous tribes, 
family names are unknown, and in semi-barbarous countries 
all that love of individuality which characterizes the progress 
of advancing civilization is studiously repressed. It is to be 
hoped the secretary will, upon reflection, retrace this step 
toward barbarism, recall his numerical edict, and permit each 
bank to be known by something more expressive than a mere 
number."^ Mr. McCulloch defended the action of the secre- 
tary, maintaining that it was not the name of a bank, but the 
character of the men who conducted its affairs, and the 
character of its securities, that won for it the public con- 
fidence.' All who connected themselves with the system had 

1 18 Bank. Mag., p. 191. ^ National Debt, p. 15. 

3 18 Bank. Mag., p. 205. 



224 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

a common interest in making it symmetrical as well as 
national. The retention by the State banks of their present 
corporate names, some of them long, and differing from others 
only in locality, would prevent this, and interfere with the 
uniformity which it was desirable to maintain in the national 
circulation. Nevertheless, the comptroller did not shut out 
the possibility of permitting the banks to retain, " in some way, 
their former corporate names." This " must be done," he 
added, " in such manner " as would not interfere with the sym- 
metry of the circulation which was to be furnished to them, 
nor render illegal their acts as national associations. At a 
later period, national banks were organized with the substi- 
tution of something more distinctive for the numeral in the 
name.* 

At the next session. Congress thoroughly amended the law. 
It could not reasonably be expected that an Act so elaborate 
would be faultless. A large portion of the comptroller's 
report was devoted to an exposition of its imperfections. The 
two most important recommendations urged were the enact- 
ment of a law making a uniform rate of interest of seven per 
cent in all the States, and the redemption of the notes of 
interior banks in the commercial cities. Congress enacted 
that national banks in nineteen of the principal places in the 
Union should keep twenty-five per cent, in lawful money, 
on hand to redeem their circulation and deposits; and other 
banks should keep six per cent on hand and nine per cent 
more with the banks in the reserve cities, while tliey, in 
turn, should redeem the circulation of the others, and select 

' The National Exchange Bank of New- York City was the fii-st national 
bank without a numeral forming a part of its name. It was authorized to 
begin business, March 16, 1864. 



1864.] THE NATIONAL BANKING SYSTEM. 225 

banks in New- York City to do the same thing for themselves. 
Such was the first step taken by Congress in the way of 
centralizing the work of redeeming the national bank issues. 
The principal new features of the law were authority to form 
banks with a larger capital, for State banks to become national 
associations " by the name prescribed in its organization cer- 
tificate," for existing national banks to change their name 
M'ithin six months from the time of enacting the law, and the 
voluntary closing of the banks thus formed. 

Many of the States now passed laws to aid the State banks 
to reorganize under the national system.' Reorganization went 
rapidly onward, as well as the formation of new banks. The 
next year the comptroller reported that two hundred and 
eighty-two new banks had been organized since the date of 
his last report, and sixty-seven State banks had reorganized. 
There were then in existence five hundred and eighty-four 
national banking associations, having a capital stock of $108,- 
964,599 and $65,864,650 circulation, and holding $81,961,450 
bonds. Reorganization was accomplished without disturbing 
the business of the country, either of curtailing the discounts 
of customers, or inconveniencing them in making their de- 
posits. Nor was the stock of the State banks depreciated by 
reorganizing ; on the contrary, the shares of most of them rose 
in value. Moreover, the fear that the national banking system 
would be the means of filling the country with banks pos- 
sessing fictitious capitals was never realized. 

' The majority of the committee on banks of the New York legislature 
opposed such a law on the ground that if the banks reorganized under it a 
large amount of capital would be released from State taxation. " There is 
no more appropriate subject of taxation," said the committee, " than banks, 
banking, and bank stocks, and none to which the States ought more perti- 
naciously to cling." The report was made April 1, 1864. 

15 



226 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

Mr. McCuUoch, therefore, in his second report, remarked 
that his experience had resulted ia the entering up of a popu- 
lar judgment in favor of the national banking system ; a judg- 
ment, not that the system was perfect, nor free from danger 
of abuse, but safer, better adapted to the nature of our political 
institutions and to our commercial necessities, giving more 
strength to the government, with less risk of use by the gov- 
ernment against the just rights of the States or the people than 
any system that had yet been devised. 

At the close of the next session of Congress, March 3, 1865, 
it was enacted that, in forming national banks a preference 
should be given to those State banks not having over $75,000, 
which applied before the first of the following July. By way 
of giving the State banks another strong boost out of exist- 
ence, Congress imposed a tax of ten per cent per annum on all 
their notes issued after July 1, 1866. No wonder that Mr. 
Clarke, who succeeded Mr. McCulloch, could say, in his first 
report, that nearly all the State banks had voluntarily changed 
into national associations. Lured with the prospect of larger 
gains by changing their corporate character, with the certainty 
of losing their circulation if they did not change, they went 
over to the majority. Happily, the transformation was made 
without deranging their business, " or affecting essentially the 
volume of bank-note circulation." 



1S61.] APPEOPEIATIONS AND EXPENDITURES. 227 



CHAPTEE XII. 

APPEOPEIATIONS AND EXPENDITUEES. 
1861-1865. 

In a former volume were described the principal appropria- 
tion laws for expending the public money. These were 
founded on annual estimates prepared by clerks in the execu- 
tive departments and submitted to Congress through the sec- 
retary of the treasury. At the beginning of the war the 
expenditures, except those relating to the public debt, were 
made chiefly by authority of one of eleven annual appropria- 
tion laws. During the war the amount annually ap2:)ropriated 
swelled enormously, but neither the mode of appropriating 
money nor the number of appropriation laws was changed. 
It was impossible to estimate with certainty the sums tliat 
would be needed for many purposes, and Congress could do 
nothing more than to follow the recommendations of the 
departments. Thus a sub-section of the army appropriation 
law for the fiscal year 1862 contained an appropriation of 
$10,000,000 for many purposes which were specified, but not 
the amount for one of them. The appropriation was a guess, 
for no one could foretell what amount would be required for 
anything. 

Beside the annual appropriation laws, a portion of the na- 
tional income has always been expended by other appropria- 
tion laws of a permanent nature. The list of these was in- 



228 FINANCIAL HISTORY OF THE UNITED STATES. [1801. 

creased during the period covered by this cliapter to pay the 
owners of captured and abandoned property in insurrectionary 
districts who could prove their right thereto in the Court of 
Claims. An " indefinite appropriation " was made in 1862 to 
pay the allowance or drawback granted on articles subjected 
to an internal duty when they were exported, also to repay 
the excess of deposits for unascertained duties, or duties or other 
money paid under protest, or for refunding duties paid or 
accruing on merchandise injured or destroyed by fire or other 
cause when in the custody of the officers of the government. 
From an early period of the government, the secretary of 
the treasury has made annually an elaborate report of the 
receij)ts and expenditures. This he has been required to do 
by a standing order of the House passed in 1 791. The report 
is prepared by the register of the treasury, and contains, first, 
a general account of the receipts and expenditures of the fiscal 
year covered by it ; second, the expenditures and repayments 
under each head of appropriation, showing the aggregate paid 
to and repaid by each individual during the year. This account 
contains the payment for the support of the civil list (that is, 
the legislative, executive, and judiciary), miscellaneous, inter- 
course with foreign nations, department of the interior, mili- 
tary establishment, naval establishment, public debt, surplus 
fund, and outstanding warrants. The third part of the report 
consists of statements of the appropriations made for the fiscal 
year, including the balances on hand at the beginning of it, 
the payments made during the year, the sums carried to the 
surplus fund, and the balances unexpended at the end of the 
year, The next part contains statements of the balances due 
by or in favor of supervisors, collectors, and officers charged 
with the administration of the internal revenue laws. Last, 



1861.] APPEOPEIATIONS AND EXPENDITURES. 229 

the report contains a statement of the annual operations of the 
land office. From this source, therefore, can be obtained 
complete and detailed information of the public receipts and 
expenditures. It is our purpose not to give any figures here, 
but to show how the government, through its officers, contracted 
for supplies and paid for them, what efficiency was displayed 
in transacting the business, what frauds were discovered, and 
how the guilty were treated. 

A few months before the war. Congress enacted that all 
purchases and contracts for supplies or services, except per- 
sonal ones, in any department, should be made by advertis- 
ing in a specified manner for proposals, unless the public 
exigency required the immediate undertaking of the service or 
furnishing of the supplies. If such an exigency arose, con- 
tracts could be made in the manner usual between individ- 
uals. More specific regulations were then prescribed for the 
secretary of the navy. He was required to make his es- 
timates for expenditures for " freight and transportation, 
printing and stationery," and twenty other specified purposes 
in detail, and the expenditures made under the appropriations 
were to " be accounted for so as to show the disbursements of 
each bureau under each respective appropriation." All appro- 
priations for specific, general, and contingent expenses of the 
navy department, it was afterward enacted, should be made 
by the secretary himself, and the appropriation for each 
bureau should be kept separate in the treasury. In making 
contracts he was required to advertise once a week for four 
weeks, in one or more of the principal papers published in the 
place where the articles were to be furnished, for sealed pro- 
posals for furnishing them, or the whole of any particular 
class of them. The advertisement, furthermore, was to specify 



230 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

the amount, quantity, and description of each kind of articles, 
and the proposals were to be kept sealed until the day speci- 
fied in the advertisement for opening them. This was to be 
done by the advertising officer, or by his direction, and in the 
presence of two or more persons. If the lowest bidder failed 
to enter into the contract, and to give the security required by 
law, the next lowest bidder had the privilege of making the 
contract on the same terms as were required of the first. This 
law, modified from time to time, had been in operation since 
1843. 

The modes for making contracts to supply the government 
were therefore simple, yet adequate, if the persons appointed 
to conduct the business had always been honest and efficient. 
But rascality, widespread and sickening, soon appeared. Said 
Mr. Van Wyck, a member of the House from New York, 
and chairman of the committee to investigate the subject of 
defrauding the government : " The mania for stealing seems 
to have run through all the relations of the government — 
almost from the general to the drummer-boy ; from those 
nearest the throne of power to the nearest tide-waiter. Nearly 
every man who deals with the government seems to feel or 
desire that it would not long survive, and each had a common 
right to plunder while it lived. Colonels, intrusted with the 
power of raising regiments, colluding with contractors, barter- 
ing away and dividing contracts for horses and other supplies 
to enrich personal favorites, purchasing articles and compelling 
false invoices to be given. While it is no justification, the 
example has been set in the very departments of the govern- 
ment. As a general thing, none but favorites gain access 
there, and no others can obtain contracts which bear enormous 
profits. They violate the plain provisions of the law requiring 



1861.] APPEOPKIATIONS AND EXPENDITURES. 231 

bids and proposals on the false and shallow pretext that the 
public exigency requires it." '■ 

The opportunities for perpetrating frauds and making 
fortunes were improved so quickly that in a short time after 
the war began the people generally were disturbed by the 
stories of peculation. At the July session in 1861 the speaker 
appointed a special committee to investigate them. Beside 
Mr. Van "Wyck, the chairman, were six more members, E. B. 
"Washburne, W. S. Holman, E. E. Fenton, H. L. Dawes, 
W. G. Steele, and James S. Jackson. The committee per- 
formed a vast amount of labor, and made three reports, the 
first on the 17th of December,^ containing over eleven hundred 
pages, the second on the 17th of July ' the following year, and 
which was a much larger document than the other, and a third 
and final report on the 3d of March, 1863.^ One of the 
gravest wrongs reported was the plain violation by the depart- 
ments of the law which required them in making contracts to 
advertise for proposals and to accept the proposal of the lowest 
bidder. Instead of executing this reasonable requirement, 
the secretaries in many cases made contracts with their friends 
for the furnishing of sup]51ies, justifying themselves on the 
ground of public exigency. Commissions were usually paid 
on the purchase-money, varying from two and one-half to five 
per cent. The committee recommended the passage of a 
resolution condemning this practice, and it was passed 
unanimously. The resolution was especially aimed at the 
navy department, where most of these peculiar contracts 
appeared. Unhappily, they were not limited to that departs 
ment. Others were found in the war department, which had 

' Cong. Globe, Feb. 7, 1862. ' No. 2, vol. 1, 37 Cong., second session. 
' No. 2, vol. 2. Ibid. * No. 49, 37 Cong., second session. 



232 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

been made during the administration of President Lincoln's 
first war secretary. 

Probably no useful purpose would be served in giving a 
lengthy history of the frauds committed. "While in contem- 
porary life we are more prone to remember the weaknesses 
of mankind than their virtues, history reverses this tendency, 
and delights chiefly in setting forth the better phases of 
human activity. It may prove useful, however, to show how 
the law was violated, in order to see clearly the need of 
remedying it, and whether the remedy prescribed was effective. 

The investigating committee were subject to severe criticism 
from the time of beginning their work until the end of the 
Congress. Nearly every person who had wronged the govern- 
ment had friends, and sought to defend himself. Newspapers 
often fought valiantly for the peculators, and so did some of 
the members of Congress. The enemies of the committee were 
watchful, and improved every favorable opijortunity for an 
assault. Especially when the members were absent from the 
House, investigating, in New York or elsewhere, an assailant 
would deliver a speech in the House, and the news would 
be sent abroad that the investigating committee had been 
attacked and no one had replied. In many ways the assailants 
sought to lessen the importance of the work of the committee, 
and to render the members unpopular. Mr. Poscoe Conkling, 
at that time a member of the House, sharply denounced the 
work of the committee, maintaining that " the nation, the 
government, classes of individuals, and individuals themselves, 
had suffered in character ; that wc had lost caste, and that 
much harm had come, not from detecting or exposing fraud 
or extravagance, but from magnifying and exaggerating what 
had happened, and charging and publishing to the world 



1861.] APPROPRIATIONS AND EXPENDITURES. 233 

what had never happened at all." His best known ally who 
assailed the committee was Schuyler Colfax, of Indiana. 

At the close of their report in December, 1861, the com- 
mittee reported the following resolution, " that the practice of 
employing irresponsible parties, having no official connection 
with the government, in the performance of public duties, 
which may be properly performed by regular officers of the 
government, and of purchasing by private contract supplies 
for the different departments, where open and fair competition 
might be properly invited by reasonable advertisements for 
proposals, is injurious to the public service, and meets the un- 
qualified disapprobation of this House." This resolution, so 
obviously proper, never passed ; the House refused to order a 
yea and nay vote thereon, and the committee were powerless 
to administer an effective check to wrong doing. They main- 
tained in their report, however, that " many frauds had been 
exposed, the government relieved from many unconscionable 
contracts, and millions of dollars saved to the treasury." Not- 
withstanding the conclusive evidence of fraud against several 
persons, the committee regretted, and so did the people, that 
punishment was not " meted out to the basest class of trans- 
gressors. They to whom this duty belonged," added the 
committee, " seemed sadly to have neglected it. Worse than 
traitors in arms," were the men declared to be, who, pretend- 
ing loyalty to the flag, feasted and fattened on the misfortunes 
of the nation. To them the committee applied the following 

couplet : 

" May life's unblest cup for such 
Be dragged with treacheries to the brim." 

" The leniency of the government toward these men," said 
the committee, in closing their remarkable report of nearly 



234 FINANCIAL HISTORY OP THE UNITED STATES. [1868. 

three thousand pages, " is a marvel which the present cannot 
appreciate and history never explain." 

Perhaps history can never explain another matter. After 
the committee had been at work for several months, Mr. Van 
Wyck desired to investigate the mode of conducting business 
at the New- York Custom-house. The other members ob- 
jected for lack of time. Finally, it was decided that Mr. Van 
Wyck should take the evidence while the other members con- 
tinued their work of investigating government contracts. A 
large body of evidence was collected by him, but very unex- 
pectedly to himself he was instructed by the committee not to 
proceed in his investigations without further orders. He 
never received orders to proceed ; the other members of the 
committee returned to New York, and after receiving evidence 
in defence of what had been done in the custom-house, ordered 
the testimony taken by Mr. Van Wyck to be deposited with the 
clerk of the Plouse, and held by him " subject only to the inspec- 
tion of any member of the committee." Why was Mr. Van 
Wyck summarily suspended from conducting his investigations? 
His aus-wer was because of " the clamor of the revenue officers 
and their friends." Personal influence is a magical power, 
the effects of which are often more clearly seen than traced to 
their precise source. This investigating committee, whose 
work is one of the most remarkable products of the thirty- 
seventh Congress, doubtless had a reason for their order in- 
structing Mr. Van Wyck to discontinue his investigations. 
What that reason was, however, we fear will never be ex- 
plained, but remain unknown, like the reason for not prose- 
cuting the public plunderers whose ignoble conduct had 
been clearly expose^, and especially those who had fraud- 
ulently enriched themselves by what the investigating com- 



1863.] APPROPRIATIONS AND EXPENDITURES. 235 

mittee, with undesigned aud rare felicity, called " private con- 
tracts." 

The investigation did yield some fruit in the nature of leg- 
islation for the prevention of fraud. Congress enacted that 
the secretaries of the navy and interior, and of war, should 
put every contract made by them, or by officers appointed 
to make contracts, in -writing and should have them signed 
with the names of the contractors, and also to file a copy in 
the '' Returns Office " of the department of the interior as soon 
as possible, and within thirty days after making them, and 
also all bids, offers, and proposals. The officers making such 
contracts were to swear to them, and penalties were prescribed 
for violations of the law. The quartermaster-general of the 
army convinced Congress that the law could not be then en- 
forced, and consequently the execution of it was delayed until 
the beginning of 1863.^ 

Two months after the law began to operate. Congress 
resolved that the chief of any bureau of the navy department 
should be at liberty to reject the offers of those who had failed 
as principals or sureties on previous contracts to furnish naval 
supplies. In those made with the same bureau, one contractor 
could not be received as surety for another ; every contract 
should require the delivery of a specified quantity, and no bids 
having nominal or iictitious prices could be considered. " If 
more than one bid be offered by any one party, by or in the 
name of his or their clerk, partner, or other person, all such 
bids may be rejected ; and no person shall be received as a 
contractor who is not a manufacturer of, or regular dealer in, 
the articles which he offers to supply, who has not a license 
as such manufacturer or dealer. And all persons offering bids 

' Act, June 2, 1862, 37 Cong., second session, chap. 93. Ibid., chap. 203. 



236 FINANCIAL HISTORY OP THE UNITED STATES. [1863. 

shall have the right to be present when the bids are opened, 
and inspect the same." ^ 

Notwithstanding this carsfully devised measure, enacted to 
supplement those already existing on the subject, and to guide 
the department in making contracts and to prevent the com- 
mitting of frauds, a committee reported the next year that 
their investigations satisfied them " beyond a doubt that in the 
matter of naval supplies the previous year the government had 
been grossly defrauded by having to pay most exorbitant and 
enormous prices for verv many of the articles procured by 
contract with the heads of several of the bureaus." 

If a person desired to bid for any class of articles that were 
advertised, he was referred to the several navy agents and 
chiefs of bureaus to ascertain what kind of an article was 
wanted whenever the advertisement did not contain the need- 
ful information. Prior to the legislation in 1863, the navy 
department claimed and exercised the right of exacting from a 
contractor the supply of a greater amount of the article 
specified than that mentioned in the advertisement. As that 
was for a class, and the bid was accepted or rejected for the 
class as a whole, he was accounted the lowest bidder whose 
aggregate amount for the whole was the least. " A bidder, 
by ascertaining what particular item would be required only 
in small quantities, and what articles would be wanted in the 
greatest quantity, was enabled, by filling the former at a very 
low figure, much below the real value or market price, to put 
a very high figure on those articles of wliich a large quantity 
would probably be required, and thus secure the contract by 
this mode of bidding to the exclusion of one who bid a fair 
and honest price for each article, although the latter would, 
• Res., March 3, 1S63, 37 Cong., third session, No. 32. 



1863.J APPROPRIATIONS AND EXPENDITURES. 237 

in fact, be most advantageous to the government." There 
were, therefore, two defects in the former system ; the na\-y 
department advertised for a great variety of articles, in which 
cases the bidder must find out, if possible, what articles would 
be wanted ; another defect consisted in advertising for a 
quantity of merchandise, with the stipulation that an addi- 
tional amount of any kind needed during the year of making 
the bid might be demanded, in which case tlie bidder must 
consider what quantities would be wanted. Thus the sched- 
ules advertised were no fixed criterion for the quantity to be 
supplied. A contractor of much experience wrote to one of 
the officers in the navy department that instead of a clearly 
defined contract, indicating what the buyer was to receive and 
the seller to give, during its continuance the result was a 
lottery to each. The law of March 3, 1863, remedied some 
of the evils. By advertising for specific quantities, fictitious 
and excessive prices disappeared. By this reform the most 
prominent evils of past years were removed. 

Yet frauds continued. One way of continuing them was to 
prevent competition among bidders. An analysis of certain 
contracts and bids with the bureaus for the year 1863 showed 
that certain parties, A, B, C, and D, of New York, obtained 
contracts of a most extraordinary nature, involving great loss 
to the government. In cases of only one bidder the national 
government suffered severely from the lack of competition. 
When only the four above named were the bidders, prices rose 
in the most remarkable manner from a high starting point. 
When competition appeared from other parties, " with a mar- 
velous intuition one or more. of A, B, C, and D moderated their 
views of the value of the merchandise, approximating the 
judgment of the outside competitor, and frequently underbid- 



238 FINANCIAL HISTOEY OF THE UNITED STATES. [1863. 

ding him altogether." In June of that year, when a more 
active competition existed, this quartette were found competi- 
tors in almost every class, " at prices as extraordinarily low as 
in February they were extraordinarily high." The clear 
inference from these facts was, that the parties. A, B, C, and 
D, knew what the other bids contained. Another way of 
practicing the frauds was to make incorrect additions. As the 
total amounts of two bills containing similar items varied, the 
smaller one was taken. Of course, when the contract was 
ultimately settled, the error would be corrected, but it had 
served the purpose designed of securing the contract.* 

Payment by the government of the vast number of obliga- 
tions constantly accruing was not easy. First of all, the 
money must be obtained for making payment. How this was 
done we have already described. But often the government 
was heavily in arrears, and contractors could not do otherwise 
than to wait. Many of them accepted certificates of indebted- 
ness in settlement of their demands. Others took greenbacks, 
or whatever the government could give to them. 

Among the most dissatisfied creditors of this period were 
the holders of the loan of 1842, which became due on the 1st 
of January, 1863. During the last three months of the pre- 
vious year, they frequently inquired of the secretary whether 
the bonds would be paid in specie or treasury-notes. The 
premium on gold was then ranging from twenty-two to thirty- 
four per cent. The secretary refused to give the desired 
information, and many of the holders, fearing they would not 
receive coin, sold their bonds at less than par.^ In the middle 
of December the House adopted a resolution directing the 
secretary to furnish a statement of the amount of the loan, 

' Senate Report, No. 99, 38 Cong., first session. ^ 19 Bank. Mag., p. 3. 



1863.] APPROPRIATIONS AND EXPENDITURES. 239 

and whether he proposed to p:iv it in coin. The principal 
object of ^Ir. Cox, who presented the resolution, was to find 
out, if possible, the secretary's intended mode of liquidat- 
ing the loan. The secretary's reply was delayed, in con- 
sequence of his resignation,' until the 5th of January, and 
after the bonds had been paid. Had he not resigned, so he 
replied, the House would have been promptly advised of his 
intention in respect to the mode of payment. His judgment 
was determined in favor of paying coin, not merely by the 
weighty considerations growing out of the beneficial influences 
of public credit, but because he could obtain the needed sj)ecie 
at a cost so small that payment in coin was, iu truth, less 
inconvenient to the treasury than payment in notes would 
have been.'- His doubt about the true mode of liquidation 
doubtless vanished ^vhen he received a joint letter, if not 
before, written at his request, and signed by the presidents of 
twenty of the New York banks, declaring that "in the nego- 
tiation of future loans, either at home or abroad, the credit of 
the government would be greatly promoted by payment [in 
coin], while a failure to meet the just expectation of the public, 
and of the holders of this loan, would deteriorate the value of 
all government stocks to an extent far exceeding the whole 

' lie. resigned on the 20th of December, and resumed office two days after- 
ward. 

' Where did he get the coin ? " The whole amount of coin required was 
advanced by moneyed institutions, most of which, it is believed, had no 
interest in the loan, nor any interest in the transaction, except what arises 
from the general support of the public credit, and the advance was made 
without premium, and at an interest of four per cent, and is not to be called 
for until it can be re-imbursed from receipts from customs." Letter on 
United-States loan created in 1841, 'Ex. Doc, No. 27, 37 Cong., third ses- 
sion. The amount of the loan was 12,883,364. 



240 FIKANCIAL HISTORY OF THE UNITED STATES. [1863. 

sum in question." The secretary ought not to have doubted 
for an instant, and his conduct caused another jar of the 
public credit.^ 

The mode of settling accounts was just the same as before 
the war. More persons were employed to transact the busi- 
ness, the number of auditors was increased, and the efficiency 
generally shown in settling claims was very great. 

Many claims, however, were irregular, and these rapidly 
multiplied during the war. The Court of Claims investigated 
and reported on a large number ; Congress adjusted others ; 
many were referred back by Congress to the departments, with 
special authority for their adjustment. Thus, in 1863, Con- 
gress authorized the secretary of the navy to adjust and settle 
the claims of contractors for those naval supplies which had 
been furnished during the preceding year that exceeded bv 
more than one hundred per cent the quantities specified in 
their contracts and without their default. The chief of any 
bureau with which any contract of the kind was made could 
associate with himself the chief of any other bureau to hear 
the evidence relating to it, but an appeal lay from his decision 
to the secretary. The law also provided that no contractor 
should be allowed, except on the excess furnished by him, and 
on this " not more than sufficient to make the price thereon 
equal to the fair market value of the supplies at the time and 
place of delivery." Nothing, however, was to be allowed anv 
contractor, unless there had been an actual loss to him on the 
whole contract. He was, moreover, required to present his claim 
within six months from the enactment of the law, or be forever 
barred from " any equitable claim " against the government." 

' 19 Bank. Mag., p. 3. 

' Kes., March 3, 1863. No. 32. 



1865.] 



THE COST OF THE WAR. 



241 



CHAPTER XIII. 



THE COST OP THE WAE. 



The cost of the war to the general government and to the 
States cannot be accurately ascertained, because claims are 
annually presented and paid ; moreover, beside the existing war 
debt, is the interest thereon, and payments for pensions, which 
doubtless will continue for many years. Revolutionary claims 
have hardly ceased, and a hundred years are likely to pass before 
the account-books for suppressing the rebellion will be closed. 

The following statement of expenditure to June 30, 1879, 
is the best that we are able to lay before the reader.^ 





Gross 
Expenditure. 


Expenditure 


Expenditure 


Appropriation. 


other than for 
the war. 


growing out of 
the war. 


Expenses of national loans and 










851,522,730 77 

59,738,167 73 

1,809,301,485 19 




$51,522,730 77 






59,738,107 73 
1,764,260,198 45 




$45,046,286 74 


Expenses ofcollecting revenue 








from customs 


99,690,808 31 


67,151,550 44 


42,539,257 87 


Judgments of Court of Claims 


6,516,260 75 


651,626 07 


4,964,634 68 


Payments of judgments Court 










9,316,753 19 




9,315,763 19 


Salaries and expenses of South- 








371,321 82 




371,321 82 


Salaries and expenses of Amer- 






ican and British Claim.s Com- 










295,878 54 
1,929,819 00 




295,878 54 






1,929,819 00 


Tribunal of arbitration at Ge- 






neva 


244,816 40 




244,816 40 


Salaries and expenses of Ala- 








253 231 12 




253,231 12 


Salaries and contingent, ex- 








penses of Pension OfHce 


7,095,968 06 


1,870,180 00 


5,226,788 05 


Salaries and contingent ex- 








penses of War Department... 


16,331,956 68 


2,712,693 79 


12,619,262 79 


Salaries and contingent ex- 








penses of Executive Depart- 








ments (exclusive of Pension 








Office and War Departmem).. 


:j3,944,017 67 


10,110,745 70 


23,833,271 97 



' Sen. Doc, No. 206, 46 Cong., second session. 
16 



242 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 



Appropriation. 


Gross 
Expenditure. 


Expenditure 

other than for 

the war. 


Expenditure 

growing out of 

the war. 


Expenses of assessing and col- 


8112,803,841 31 

2,064,199 82 

420,041,037 75 

357,618,966 61 

101,528,573 37 
407,403,324 81 

4,626,219 66 
366,651,406 31 

130.990,702 95 

49;872,069 48 

487,881 45 

184,473,721 26 

1,040,102,702 68 
868,305 41 

14,386,778 29 
0,126,962 66 

844,160 66 
4,824,877 68 
38,522,046 21 1 
31,760,345 95 
69,998,786 71 

208,158 11 

9,635,512 86 

597,178 30 

31,297,242 60 

96,152 00 

296,097 28 
2,508,639 91 
9,713,873 13 

46,964,146 83 

196,048 32 
66,000 00 

2,232,786 12 

123,487 49 
609,283 21 




8112,803,841 31 

2,207,485 61 

381,417,648 68 

299,481,917 66 

85,342,7.33 63 
330,793,885 56 

3,02.5,219 66 
346,543,880 20 

120,072,423 44 

31,070,846 69 

448,731 45 

78,084,729 47 

1,040,102,702 68 




84r,i;,7i4 21 
38,623,489 17 
68,037,048 95 

16,185,839 74 
70,609,439 25 

1,601,000 00 
11,107,680 11 

4,31.'<,3:i9 61 

18,801,822 89 

39,150 00 

106,388,991 79 




Quart.t'i-master's Department..., 
Incidentixl expenses of Quarter- 
master's Department 


Transjinrtation of the Army 

Transportation of otficers aud 


Clottiing of the Army 


Purchase of horses for cavalry 




Heating and coolting stoves 

Pay, mileage, general expenses, 


Pay of two and three years' 






Pay, ic, of one hundred days' 




14,380,778 29 
0,120,962 65 

844,160 65 
4,824,877 68 






Pay, &<:, to officers and men in 
the Department of the I\ris- 




Pav and supplies nf one hun- 




Bonnty to volunteers and regu- 




Bounty to volunteers and their 
widows and legal heirs 




31,760,346 95 

69,998,786 71 

268,158 11 

9,635,512 85 

697,178 30 
31 ^97 242 60 


Additional bounty act of July 
'.-i, 1866 




Col lection and payment of boun- 
ty, Ac, to colored soldiers, &f. 

Reimbursing States for moneys 
expended for payment of 
military service of United 
States 1 






Defraying expenses of minute- 
men and volunteers in Penn- 
sylvania, Maryland, Ohio, In- 




Refunding to States expenses 
incurred on ai^oount of volun- 
teers 




Reimbursements to Baltimore 
for aid in construction of de- 
fensive works in 1863 




96,162 00 

296,097 28 
1,297,966 86 
9,713,873 13 

45,108,770 30 

196,048 32 


Payment to members of certain 
military organizations in 






1,270,673 51; 




Medical and Hospital Depart- 
ment . ... 


1,845,376 47 


Medical and Surgical History 
and Statistics 






65,000 00 
2 232,785 12 


Providing for comfort of sick, 
wounded, and discharged 
soldiers 




Freedmen's Hospital and Asy- 
lum 


12.'i,4S7 49 


Artificial limbs and appliances 




609,283 21 



' Sen. Doc, No. 74, 46 Cong., second session. 



1865.] 



THE COST OF THE WAE. 



243 



Appropriation. 



Gross 
Expenditure. 



Expenditure 

other than for 

the war. 



Expenditure 

growing out of 

the war. 



Ordnance service 

Ordnance, ordnance stores, and 
supplies 

Armament of fortifications. 

National armories, arsenals, 
&a , 

Purchase of arms for volunteers 
and regulars 

Traveling expenses First Mich' 
igan Cavalry and California 
and Nevada \'olunteers 

Payinent of expenses under re- 
construction acts... 

Secret service 

Books of tactics 

Medals of honor , 

Support of National Home for 
disaiiled volunteer soldiers... 

Publication of official records of 
war of the rebellion 

Contingencies of the Army and 
Adjutant - General's Depart- 
ment 

Pavraents under special acts of 
rV'lief 

Copying official reports 

Expenses of court of inquirj' in 
1868 and 1869 

United States police for Balti- 
more 

Preparing a register of volun- 
teers 

Army pensions i 

Telegrapl) for military purposes 

Maintenance of gunboat fleet 
proper 

Keeping, transporting, and sup- 
plying prisoners of war 

Permanent forts and fortifica- 
tions; surveys for military 
defenses; contingencies of 
fortifications ; platform for 
cannon of large caliber, &c. 
from 1862 to 1868 

Construction and maintenance 
of steam-rams 

Signal service 

Ounboats on the Western rivers 

Supplying, transporting, and 
delivering arms and muni- 
tions of war to loyal citizens 
in States in rebellion against 
the Governmentof the United 
States 

Collecting, organizing and drill- 
ing volunteers 

Bridge-trains and equipage 

Tool and siege trains 

Completing the defenses of 
Washington 

Commutation of rations U> pris- 
oners of war in rebe" 

National cemeteries 

Purchase of Ford's theatre 

Temporary relief to destitute 
people in District of Columbia 



86,114,533 38 

59,738,079 70 
12,336,710 88 

29,730,717 63 

76,378,935 13 

84,131 50 

3,128,90S 94 

681 ,.187 42 

l7--:,r.i;8 15 

20,S',)0 00 

8,546,184 76 

170,998 98 

3,291,835 14 

1,088,400 S3 
5,000 00 

5,000 00 

100,000 00 

1,015 45 

437,744,192 80 

2,500,085 80 

5,244,684 32 

7,659,411 60 



20,887,756 96 

1,370,730 42 

222,269 79 | 

3,239,314 18 



1,649,-596 57 

29,091,666 57 

1,413,701 75 

702,230 00 

912,283 01 

320,636 62 

4,ln2,s4S 39 

88,000 00 



3,864,146 87 
2,118,238 79 

6,127,228 21 



565,136 39 



30,315,000 00 



7,483,765 87 
78,472 23 



$4,553,631 71 

55,933,932 83 

10,218,472 09 

23,603,489 32 

76,378,935 13 

84,131 50 

3,128.905 94 

681,587 42 

172,568 15 

29,890 00 

8,546,184 78 

170,998 98 

2,726,698 75 

1,088,406 83 

5,000 00 

6,000 00 

100,000 00 

1,015 45 

407,429,192 80 

2,500,085 80 

5,244,684 32 

7,659,411 60 



13,403,991 09 

1,370,730 42 

14:1,797 56 

3,239,314 13 



29,091,666 5Y 

1,413,701 75 

702,250 00 



320,r,3n 62 

4,li:2,S48 39 

88,0li0 00 

57,1)00 00 



1 See Beport of Third Auditor, 18S4. 



244 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 



Appropriation. 



Gross 
Expenditure. 



Expenditure 

other than for 

the war. 



Expenditure 

growing out of 

the war. 



Headstones, erection of head- 
stones, pay of superintend- 
ents, and removing the re- 
mains of ofBeers to national 
cemeteries 

State of Tennessee for keeping 
and maintaining United 
States military prisoners 

Capture of Jetf. Davis 

Removing wreclt of gunboat 
Oregon in Chefunct River, 
Louisiana 

Support of Bureau of Refugees 
and Freedmen 

Claims for Quartermaster's 
stores and commissionary 
supplies 

Mi.seellaneous rhiims audited 
by Tliird Auditor 

Claims of loyal citizens for sup- 

Elies furnisiied during the re- 
ellion 

Payment for use of Corcoran 
Art Gallery 

Expenses of sales of stores and 
material , 

Transportation of insane volun- 
teer soldiers 

Horses and other property lost 
in military service 

Purcliaso of cemetery grounds 
near Columbus, Ohio 

Fortifications on the northern 
frontier 



Pay of the Navy 

Provisions of the Navy 

Clothing of the Navy 

Construction and repair 

Equipment of vessels 

Ordnance 

Surgoons' necessaries 

Yards and Docks 

Fuel for the Navy 

Hemp for the Navy , 

Steam machinery 

Navigation 

Naval Hospitals 

Magazines 

Marine Corps, pay, clothing, Ac. 

Naval Academy 

Naval Asylum, Philadelphia. 
Temporary increase of the Navy 
Miscellaneous appropriations.. 

Naval pensions 

Bounties to seamen 

Bounty for destruction of ene- 
mies' vessels 

Indemnity for lost clothing 



«1,C 



),185 64 



22,749 40 
97,031 62 



6,500 00 
11,454,237 30 

850,220 91 
94,223 11 

4,270,304 54 

125,000 00 

6,842 43 

1,000 00 

4,281,724 91 



600 00 

,748 12 
,073 96 
,931 16 
,491 98 
,781 25. 
,614 53: 
,357 67 
,769 74 
,156 59 
754 36 
,916 69 
,318 67 
,247 00 
,452 34 
822 13 
906 00 
,440 87 
,049 89 
,766 21 
,044 77 
,043 00 
,530 10 



683, 

144,549, 

32,771, 

2,709, 

170,007: 

25,174, 

38,063, 

2,178, 

33,638, 

19,952, 

2,836. 

49,297; 

2,526, 

875, 

7.53, 

16,726, 

2,640, 

652, 

8,123; 

2,614, 

7,640, 

2,821, 



271,309 28 
389,025 33 



$47,112 11 



70,080,709 02 

16,40.3,307 34 

1,114,701 00 

35,829,684 80 



6,641,263 30 
241,025 68 
3,337,854 62 
8,612,521 68 
1,938,664 42 



37.5,789 40 

349,290 48 

8,969,290 82 

778,308 86 

66,394 00 



$1,080,185 54 

22,749 49 
97,031 62 

5,600 00 
11,454,237 30 

860,220 91 
47,111 00 

4,170,304 64 

126,000 00 

6,842 43 

1,000 00 

4,281,724 91 

500 00 

683,748 12 

74,462,304 34 

16,368,623 82 

1,694,790 98 

134,178,096 45 

26,174,614 .^3 

31,422,094 37 

1,937,744 06 

30,300,302 07 

11,340,232 68 

8as,2.i2 27 

49,297,318 57 

2,626,247 00 

499,662 94 

404,531 66 

7,767,615 18 

1,862,132 01 

586,665 89 

8,123,766 21 

2,614,1144 77 

6,590,043 00 

2,821,530 10 

271,309 28 
389,026 33 



Total expenditures... 



$6,844,671,431 03 



$054,641,522 46 



1,189,929,908 oS 



Near the close of 1865 a bill was introduced into the 
House to reimburse the loyal States for the advances they 
had made and debts contracted in support of the war. The 



1865.] THE COST OF THE WAR. 245 

amount expended by the States and municipalities was |467,- 
954,364. The expenditure by each State is shown in the 
following table : 



Maine $12,632,580 

New Hampshire . . . 13,125,000 

Vermont 8,806,759 

Massachusetts .... 47,809,827 

Ehode Island .... 6,500,772 

Connecticut 17,386,151 

New York 111,005,953 

New Jersey 26,786,421 

Pennsylvania .... 53,527,395 

Delaware 1,140,000 

Maryland 8,656,458 



West Virginia .... $2,000,000 

Ohio 64,867,813 

Indiana ...... 22,334,967 

Illinois 30,000,000 

Michigan 12,000,000 

Wisconsin 12,240,795 

Minnesota 2,518,361 

Iowa 2,200,000 

Missouri 9,446,575 

Kentucky 2,150,537 

Kansas 818,000 



Of the expense incurred by the States, only a portion 
appears in the above statement. With the swift cooling of 
the war fever, bounties became necessary to stimulate enlist- 
ment, and the war expenses of the States and municipalities 
rapidly increased. In 1861 the highways were filled with 
volunteers eagerly rushing to the front; in 1865 they went 
with much slower pace and with a better conception of the 
hazardous game of war. 

A large portion of State expenditure was for bounties to 
avoid applying the principle of conscription. "As this was 
for an object no less national in its character than the pre- 
servation of the general government, the States had a right to 
expect that in some form they would be reimbursed." 

One plan for doing this was to relinquish to them " some 
particular source of revenue — to be appropriated and used by 
the States to that express purpose." It was proposed to 
devote' the income tax to this purpose. ' 

■ Sen. Mis. Doc, No. 4, 39 Cong., second session. 



246 FINANCIAL HISTORY OF THE UNITED STATES. [1866. 

A committee of the House recommended the reimbursing 
to the States of twenty-five per cent of the average expendi- 
ture of each soldier who had served three years, in addition 
to the amount paid by the general government.' The total 
number who had served the government was 2,688,523, and 
for the average period of three years, 2,154,311.^ The 

1 Feb. 16, 1866, No. 16, 39 Cong., first session. 

' The following tables give the number of soldiers and their length of 
service by States. 



States and Territories. 


la 


Men furnished under call of 
May 3, 1861, Ccouflrmed by 
Act of August 6, 18^1) and 
also under calls under acts 
approved July 22 and 25, 
1861, for 300,000 men, for- 


is 
if 

o3 
l-a 


II 

W QJ 

as 
■OH 

la 

Sm p.. 


S6 

is 
% 

t-^ d 


|i 

Vh 

Ilia 

111 
gll 


lis 
ill 

£-£| 
3^S 




a 


i 

a 
o 


i 

p., 

o 


i 
1 


111 
gsi 

s 


1 Maine 


771 

779 

782 

3,7:!ri 

3,147 

2.402 

13,90b 

3,123 

20,17.i 

776 








18,104 

8,338 

9,508 

32,177 

6,280 

10,866 

89,281 

11,523 

85,160 

1,826 

9,365 

12,757 

1,795 

8.3,2.53 

59,643 

81,952 

23,546 

25,499 

5,770 

21,987 

22,,324 

29,966 

0,963 

.3,989 

5,701 




6,644 

6,390 

4,369 

16,519 

2,742 

9,196 

78,904 

5,499 

30,891 

2,508 

3,586 

4,925 

1,167 

68,326 

30,359 

68,689 

17,666 

14,472 

4,626 

24,438 

28,324 

6,463 

2,930 

8,088 

1,760 

216 

15 


7,620 
1,736 
4,781 
16,686 
2,059 
5,602 
1,781 
10,787 
32,216 
1,799 




13,912 


2 New Hampshire 












6,967 
8,611 






















103 


21,413 
3,686 




















"8,588 




11,874 
75,733 
9,187 
66,369 








30,950 




8 New Jersey 

9 Pennsylvania. ... 
















3,708 








2,573 
7,350 
3,988 












1,616 
1,148 


12 West Virginia... 


900 

4,720 

12,357 

4,680 

4,820 

781 

817 

930 

908 

10,591 




















4,888 
32,837 


14 Ohio 




803 
1,698 








2,736 
3,767 


15 Indiana 




1,723 
4,696 


337 


22,228 




32,179 
20,047 


17 Miohigan 






















958 




15,469 






1,167 








3,062 


20 Iowa 










9,.396 




2,716 


199 

5,129 








» 3,284 


3,889 










4,785 


23 Kansas 


660 












6,374 
































































662 
895 










28 Wasn Ter'y 






























81 
309 
94 
21 


1,198 






30 Oolorado Ter'y 










1,463 
87 
81)4 









31 Dakota Ter'y 


















32 N. Mexico Ter'y 


1,610 






























Totals 


93,326 


2,715 


9,056 


30,950 


671,419 


16,007 


4:W,201 


87,558 


16,361 


374,807 







* Furnished In November, 1664. 



t Which embraces men raised b; draft Id 1 



1866.] 



THE COST OF THE WAK. 



247 



average cost of each soldier was $220. One quarter of the 
cost therefore was §55 per man, the aggregate of which was 
§118,487,105. The committee further recommended the 
issue of bonds for this amount, payable in twenty years from 
their date. Among other reasons in support of this recom- 
mendation was the monopolizing by the government of all 
the channels of indirect taxation, leaving to the States no 
mode of raising a revenue, except " that which is the hardest 
and most oppressive, the direct local tax." As the House 





II 
St 

Is 


|i 

C" 3 


Men furnished under call of 
July 18, 1864, for 500,000 men 
for— 


Men furnished under eall of 
Dcecmher 19, 1864, tor 300,- 
000 men, for— 


i 

a ■ 

°? 
1.1 

--1 


^1 

lb 




a 
O 


1 


1 


1 

t-. 

3 

S. 


i 

a 



1 

i 




i 

s 


• = £ 

II: 

-< 


1 


7,042 

2,955 

1,690 

18,876 

2,032 

5,260 

44,453 

12,611 

45,617 

1,603 

11,501 

3,857 

1,142 

36,221 

14,783 

21,351 

7,697 

10,059 

3 494 




8,331 

1,921 

1,861 

6,990 

1,233 

495 

56,968 

10,882 

42,133 

1,558 

6,229 

1,726 

90S 

2r,,613 

17,733 

13,482 

5,983 

10,921 

2,794 

4,062 

7,782 

5,084 

29 


131 

25 

18 

108 

196 

20 

1,606 

540 

433 

9 

246 

28 

59 

701 

507 

535 

57 

86 

205 

60 

1,295 

169 

3 


2,590 

4,027 

2,081 

24,r41 

891 

10,318 

2.i,297 

3,697 

12,493 

593 

3,727 

202 

937 

4,625 

7,153 

1,375 

6,492 

5,832 

239 

168 

14,430 

10,137 

319 


1 
" 'li 

'"24 

72 

"198 
15 
64 

"343 


4,626 

492 

962 

1,533 

739 

34 

9,137 

6,501 

26,744 

376 

3,237 

2,112 

693 

21,721 

20,736 

25,835 

6,775 

9,620 

2,691 

771 

3,161 

1,986 

623 


141 

9 

29 

40 

92 

5 

1,616 

1,075 

204 

5 

430 

9 

12 

641 

243 

355 

41 

16 

12 

15 

44 

7 

36 


1.829 

771 

534 

2,1,53 

618 

1,174 

20,2.57 

3,162 

3,267 

11 

1,094 

361 

116 

926 

2,2.59 

1,620 

1,044 

236 

54 

22 

1,002 

5,405 

170 


3 

28 
9 
2 

""2 
67 
155 
44 

■'"2 


71,746 

34,605 

35,246 

151,785 

23,711 

57,270 

464,156 

79,511 

366,326 

13,651 

49,731 

32,003 

16,872 

317,133 

195,147 

258,217 

90,119 

96,118 

25,034 

75,860 

108,773 

78,.540 

20,097 

12,077 

7,451 

216 

617 

895 

1,279 

1,762 

181 

2,396 


56,695 
30,827 
29,062 

123,844 
17,878 
50,514 

381,696 
55,785 

267,568 
10,303 
40,692 
27,653 


2 
3 


167 


4 

1 


6,809 


f^ 




7 
8 
9 

in 


6,640 

769 

7,675 


11 
1? 


1,297 


n 




11,506 


14 
15 
16 

17 


36,254 
7,197 

ll,:i28 


237,976 
152,283 
212,694 
80,865 


18 
IQ 


2,l:i4 


78,985 
19,675 


20 
"1 


10,072 
9,733 
9,409 
2,563 


3,901 


68,182 
86,192 


90 




70,348 


23 
24 


441 


18,664 
12,077 
























7,451 
























216 






*40 


















581 






















895 


■>9 




















380 


30 


















1,762 


















181 


32 




















1,011 





























284,021 


83,652 


234,798 


7,087 


142,269 


728 


151,105 


6,076 


48,079 


312 


2,688,623 


2,164,311 



* Furnished tor four moaths. 



248 FINANCIAL HISTOEY OF THE UNITED STATES. [1866. 

did not regard the recommendation of the committee favora- 
bly, Mr. Blaine, the chairman, moved that the bill be recom- 
mitted and continued until the next session. This was done, 
and then the subject was pressed forward. After several 
delays he succeeded, on the 14th of February, in getting 
the House to act. The bonds recommended by the committee 
were not to be negotiable until after the 1st of July, 1887, 
" and then only upon the indorsement of the governor of the 
State." Mr. Delano, of Ohio, was opposed to the bill because 
other claims which had been presented first demanded the 
attention of the House, especially those of loyal persons in the 
loyal and disloyal States whose property had been taken for 
the use of the army. The question of paying these must be 
met ; moreover, they created a demand on the government 
infinitely more potential than the claims of the States. Be- 
sides, a bounty bill, which demanded " consideration, perhaps^ 
over any other measure," would take $2-50,000,000 from the 
treasury. He was " for the measure," but thought it could 
"bear postponement," and so did a large majority of the 
House. Thus the bill was safely entombed, nor has any 
archangel of Congress yet blown the trumpet of resurrection. 



BOOK II. 

FEOM SEPTEMBEE, 1865, TO MARCH, 1885. 



CHAPTER I. 

CONSTITUTIONALITY OF THE LEGAL-TENDER LAW. 

The constitutionality of the bill for issuing legal-tender 
notes was questioned from the beginning. Notwithstanding 
the declaration of many members of Congress that they would 
not favor the extension of the principal, $450,000,000 of 
legal-tender notes were authorized, beside $400,000,000 of one 
and two year notes, bearing not more than six per cent inter- 
est in currency, and $400,000,000 of three-year notes — an 
aggregate of $1,250,000,000.' There is no reason to think, 
said Mr. Chase, after he assumed the judicial office, that the 
utility of the interest-bearing notes was increased or diminished 
by making them a legal tender for their face amount. That 
they never entered largely or permanently into circulation, a 
statement also made by him, is partly true, for they did not 
live long, yet while they did, many millions were cir(;ulated. 

" The Acts under which legal-tender notes were issued may be thus sum- 
marized : 

February 25, 1862 $150,000,000 

July 11, 1862 150,000,000 

January 17, and March 17, 1863 150,000,000 

March 3, 1863, six-per-cent interest-bearing notes, running 

not longer than two years 400,000,000 

June 30, 1864, and January 28, 1865, 7.3 per-cent interest- 
bearing notes, running for three years or longer . 400,000,000 
See statement of indebtedness in Appendix of any Annual Finance 
Report for several years after the war ; also, Knox's United-States Notes, 
chap. ix. 

251 



252 PIITANCIAL HISTORY OF THE TTNITED STATES. [18G3. 

Throughout the war, and afterward, the constitutional doubt 
hanging over them affected their value. This doubt was used 
as an argument against the national banking system, for it 
was proposed to redeem the notes of the banks in those issued 
by the government. If the law authorizing their issue should 
be declared unconstitutional, in what jeopardy would the 
banks be put ! On the other hand, their issue was regarded 
as temporary, and their disappearance certain, as soon as the 
war closed, by conversion into bonds. Had this expectation 
been fulfilled, the supreme court would have had no occasion 
for making a series of legal-tender decisions, which caused 
more commingled joy and regret than any decision, except 
that against Dred Scot, ever made by that tribunal. 

The first decision concerning the constitutionality of the legal- 
tender law was made by the Supreme Court of New York in 
April, 1863.' The court sustained the law on the ground of 
necessity. We know of no opinion subsequently written con- 
taining better reasoning for sustaining the law. " For the 
purpose of carrying on the war in which our people are 
engaged, the government may lawfully seize and appropriate 
the property of any citizen for the public use. The sovereign 
power of the State may do whatever is necessary for the safety 
and defence of the State. The only limit to its power under 
our constitution is, that the means be, in the opinion of Con- 
gress, necessary and proper to accomplish the end in view 
in the exercise of any of the enumerated powers of gov- 
ernment. If the government may seize and appropriate the 
property of the citizens without limit, to carry on the war, and 
for the common defence, certainly it may take it by means of 
forced loans. All governments in times of war have been 
' Hague vs. Powers, 39 Barbour, p. 427. 



1883.] COXSTITUTIONxVLITY OF LEGAL-TENDER LAW. 253 

obliged to resort to such loans, and their usefulness is 
unquestionable ; for salus populi suprema lex is the universal 
rule among all nations in time of war. 

" It is said that it may be necessary for the government to 
borrow money and issue treasury-notes, but that does not make 
it necessary and proper under the general clause of section 
eight of the constitution, above recited, to make such notes a 
legal tender." This the court conceived "to be purely a 
question of legislative discretion." 

" INIoney is necessary to carry on the war, and sustain the 
government in the exercise of all the foregoing enumerated 
powers. If, in the opinion of the legislature of the nation, it 
is necessary and proper to issue treasury-notes, and to make 
such notes a legal tender, in order to procure the requisite 
money and keep up the credit of the government, and prevent 
its failure and overthrow, most certainly the legislative 
authority of the nation has the sovereign and unquestionable 
right so to declare and so to enact. It does not pertain to the 
judiciary to question the propriety of the exercise of its 
undoubted discretion on the subject." 

The Court of Appeals of New York ^ decided in the same 
way, and Mr. Chase was gratified " to know that a tribunal 
so distinguished by the learning and virtue of its members 
had given the sanction of its judgment to the constitutional 
validity of the law." ^ Not long afterward he gratified him- 
self even more by deciding the same question the other way. 

All the State courts except Pennsylvania^ followed in the 
wake of the courts of New York ; nevertheless, the question 

1 Metropolitan Bank vs. Van Dyck, 27 New York, p. 400. 

' Ann. Treas. Eeport, 1863. 

' Shollenberger vs. Brinton, 52 Penn., p. 9. 



264 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

could be settled only by the decision of the supreme federal 
tribunal. In newspaper, magazine, and pamphlet, the matter 
was discussed from every side. What the framers of the con- 
stitution said and intended was told over and over, yet we 
have abundant proof for saying that a large portion of the 
most intelligent and candid persons sustained the Act as a 
Avar measure and on that ground alone. They did not 
attempt to find the power to issue notes in the constitution, 
but in a necessity more imperious than any written law. 

In December, 1867, the case of Hepburn against Gris- 
wokl,' which involved the question of the constitutionality 
of the law, was argued before the United-States Supreme 
Court. Nearly three years had passed since the close of the 
war, ample time, truly, for converting the notes into bonds, 
yet nearly the whole amount remained in circulation. 
The question was deemed so important by the attorney-gen- 
eral, Mr. Hoar, that he desired a reargument of the case in 
order to be heard. An order was made accordingly, and at 
the succeeding term the case was reargued. The next April 
a law was passed increasing the number of judges from eight 
to nine, but no appointment was made until the end of 
January, 1870. After the second argument the court held 
\he case under advisement until November, 1869, when a 
majority, consisting of the chief justice and four of his 
associates. Nelson, Grier, Clifford, and Field, decided the law 
to be unconstitutional, and appointed the chief justice to write 
the opinion. This was read in conference on the 29th of 
January, 1870, by the chief justice, his fo\ir associates above 
mentioned expressing their concurrence. He would have read 
it in public two days afterward, had not the minority re- 
' 8 Wallace, p. 603. 



1870.] CONSTITUTIONALITY OF LEGAL-TENDER LAW. 255 

quested the postponement of the public reading for a -week in 
order to give them time to prepare a dissenting opinion to be 
read on the same occasion. On the 31st of January, Judge 
Grier was present, but the next day he sent his resignation 
to the President. When, therefore, the chief justice read his 
opinion, two vacancies existed on the bench, one caused by 
Judge Crier's resignation and the other by operation of law 
increasing the number.^ 

The decision was not a surprise. The opinion of the four 
associates had long been known, and though Mr. Chase had 
favored the issue of legal-tender notes when secretary of the 
treasury, it was generally believed that he had changed front 
on the subject. Yet the genuineness of his conversion was 
doubted, and probably always will be. Of course, human 
conduct is marked with mental and moral imperfection, and 
if Mr. Chase had really undergone a change of opinion, he 
did right in deciding against the constitutionality of the law. 
He hesitated to declare, when secretary, that no constitu- 
tional barrier existed against issuing the notes, and did 
so solely because the necessities of the government were so 
pressing.^ Did he, when reflecting on the event, conclude 
that the necessities were not so grave in 1862, as he declared 
them to be ? If they did not exist, why did he resort to the 
issuing of a kind of notes which were so distasteful to him ? 
Had he admitted in 1869 that he was in error in 1862, no one 
would have questioned the admission. He did not admit this, 
though his decision, in truth, implied as much, for surely if the 
government could have found any other way to obtain money, 
the necessity for issuing the notes did not exist. Strenuous 

' See Dissenting opinion by Mr. Justice Field in Knox vs. Lee. 

' See page 54. 



256 FINANCIAL HISTORY OP THE UNITED STATES. [1870. 

to create them, Judge Chase's decision is a strong adverse 
judgment against the correctness of his conception of the 
situation of the government at that time. Did the chief jus- 
tice understand this when rendering his decision ? He knew 
that his opinion of the constitutionality of the law was contrary 
to the one formerly expressed, but probably he went no 
further. His reason for changing has never been satisfactory 
to all his friends. One class have never questioned its sound- 
ness ; another and much larger class have believed that the true 
reason for his opinion was not put in writing. The presidential 
vision had been haunting and tormenting him for several years. 
It obtruded even in the serene air of the court-room. Like Poe's 
Raven, it would not go away at his bidding. He believed 
that he could improve his chance to get the presidential nomi- 
nation of the Democratic party by declaring the legal-tender 
law to be unconstitutional. If, therefore, in rendering the 
legal-tender decision, he forgot the injunction to " turn not 
aside from the commandments to the right hand or to the 
left," his heart certainly was " not lifted up above his breth- 
ren." Such is the verdict of his best friends. This decision, 
as he believed, bore directly on his political prospects, and he 
sought to improve the occasion to the utmost for himself 
Tried by the Judean standard, his judgment was not like the 
morning before the sun riseth, even as the morning without 
clouds. 

The decision produced no serious effect on business. If the 
legal consequence had been to render the notes void, the effect 
would have been terrific, but the only effect was to deprive 
them of their legal-tender quality. They circulated just as 
readily as before. No change was made in the bank reserve. 
What would have happened had the decision been made in 



1870.] CONSTITUTIONxlLITY OF LEGAL-TENDER LAW. 257 

1864 instead of 1870 need not be considered; doubtless, the 
power of the government to carry on the war would have 
been dreadfull}^ shaken. In 1870, however, there was no oc- 
casion for stretching further the legal-tender power ; the debt 
had been put into a manageable form, a large reduction had 
been made, the public credit had been greatly strengthened, 
and, so far as the government was concerned, the decision 
had no effect on its credit. The notes were worth no 
more nor less ; their redemption was neither hastened nor de- 
layed. It is true that a speedy decision of a diiferent kind 
was confidently expected at the time this was rendered, 
and had this not been the case the decision might have 
proved more serious, at least to private interests. Anyhow, 
as the sky of the debt-owing classes was gilded with this ex- 
pectation, they did not suffer. 

Why did they expect that the supreme court would reverse 
their own decision ? Because the two vacancies existing on 
the bench -when Hepburn against Griswold was decided were 
soon after filled by Judges Strong and Bradley, who had pre- 
viously expressed favorable opinions of the law in private 
consultations.^ Thus a court now existed, composed of five 
judges who regarded the law constitutional, and four who had 
declared it invalid. As soon as the bench was filled Attorney- 
general Hoar applied for another argument of the question 
in the case of Knox against Lee.^ This application was 

' See articles in ^S'. Y. World, April 7 and 11, 1874, Was the Supreme 

Court Packed, and the Packed Supreme Court's Legal-Tender Decision; 

Brooks Adams's article in 6 International Eev., p. 635; Bowen's Basis and 

Scope of the Legal-Tender Decisions ; Spear's Legal-Tender Acts, chap. 7, 

on their Construction ; Fiat Money : a Beview of the Decisions of the U. S. 

Sup. Ct. aa to its Constitutionality, by Francis A. Brooks. 

M 2 Wallace, d. 457. 

17 



258 FINANCIAL HISTOEY OF THE UNITED STATES. [18TO. 

granted, the third argument was made, and five judges against 
four declared the law to be constitutional. Judge Strong 
wrote the opinion of the court, and his new associate, Judge 
Bradley, wrote another. Thus the question was finally settled. 
Judge Strong remarked that it would be difficult to over-esti- 
mate the consequences which must follow the decision. They 
would affect the entire business of the country, and take hold 
of the possible continued existence of the government. " If," 
said he, " it be held by this court that Congress has no con- 
stitutional power, under any circumstances, or in any emer- 
gency, to make treasury-notes a legal tender for the payment 
of all debts (a power confessedly possessed by every independ- 
ent sovereignty other than the United States), the goveraruent 
is without those means of self-preservation, which, all must 
admit, may, in certain contingencies, become indispensable, 
even if they were not when the Acts of Congress now called 
in question were enacted. It is also clear that if we hold the 
Acts invalid as applicable to debts incurred, or transactions 
which have taken place since their enactment, our decision, 
must cause, throughout the country, great business derange- 
ment, wide-spread distress, and the rankest injustice." 

In the nou-euumerated powers of the constitution authority 
was expressly given " to make all laws -which shall be necessary 
and proper fop carrying into execution the specified powers 
vested in Congress." Were the legal-tender laws, "when 
enacted, appropriate instrumentalities for carrying into effect, 
or executing any Qf the known powers of Congress, or of any 
department of the government?" Judge Strong then briefly 
set forth the condition of the country when Congress attempted 
to make treasury-notes a legal tender. " Now," he continued, 
" if it were certain that nothing else would have supplied the 



1870.] COIsSTITUTIONALITY OF LEGAL-TENDER LAW. 259 

absolute necessities of the treasury, that nothing else would 
have enabled the government to maintain its armies and navy, 
that nothing else would have saved the government and the 
constitution from destruction, while the legal-tender Acts 
would, could any one be bold enough to assert that Congress 
transgressed its powers ? Or, if these enactments did work tliese 
results, can it be maintained now that they were not for a 
legitimate end, or appropriate and adapted to that end, in 
the language of Chief Justice Marshall ? That they did work 
such results is not to be doubted." 

The next step in the argument was important, especially in 
view of a subsequent determination by the same court. " If it 
be conceded that some other means might have been chosen 
for the accomplishment of these legitimate and necessary ends, 
the concession does not weaken the argument. . . . Can this 
court say that it ought to have adopted one rather than the 
other ? Is it our province to decide that the means selected 
were beyond the constitutional power of Congress, because we 
' may think that other means to the same ends would have been 
more appropriate and equally efficient? That would be to 
assume legislative power, and to disregard the accepted 
rules for construing the constitution. The degree of the 
necessity for any congressional enactment, or the relative 
degree of its appropriateness, if it have any appropriateness, 
is for consideration in Congress, not here." 

Judge Strong did not intend, nor did Judge^ Bradley, so 
Reverdy Johnson tliought,^ to decide that the Act would justify 
the issuing of legal -tender notes in a time of peace. Mr. John- 
son was one of many persons in so thinlving. When Senator 

' Letter in N. Y. Tribune, Aug. 14, 1875. See ex-Gov. Dix'a letter to 
Mr. Johnson on the subject, N. Y. Times, Sept. 18, 1875. 



260 FINANCIAL HISTORY OF THE UNITED STATES. [1883. 

Sherman reviewed the opinion of the chief justice a few 
months after its delivery, criticising it severely, he added, " It 
must be remembered that the legal-tender clause was justified 
only by the exigencies of war. It was not intended as a 
measure of peace. The legal tenders were only the instru- 
ments of battle ; they were musketry and cannon ; and when 
peace came, they should have been rapidly retired." And on 
another occasion he said that the necessity for issuing them 
had " long since ceased. There can be no pretence that as to 
future contracts there is any necessity that the public credit 
should take the place of real money." 

These reflections on the last opinion of the court culminated 
in the trial of another case ' involving the f|uestion whether 
Congress possessed authority to issue legal-tender notes in time 
of peace.^ When the supreme court answered it nine judges 
were on the bench and only one dissented. 

After quoting from the constitution those clauses which 
grant authority " to lay and collect taxes, to pay the debts 
and provide for the common defence and general welfare of 
the United States," and, " to borrow money on the credit of 
the United States, and to coin money and regulate the value 
tliereof and of foreign coin," and after showing that as 
incidental to the exercise of those great powers to emit bills of 
credit, to charter national banks, and to provide a national 
currency for the whole people in the form of coin, treasury- 
notes and national bank-bills, " and the power to make the 
notes of the government a legal tender in payment of private 
debts being one of the powers belonging to sovereignty in other 
civilized nations, and not expressly withheld from Congress 
■ Juilliard vs. Qreenmau, 110 U. S. Snp. Ct., p. 421. 
' See Spaiilding, Introduction to 2(1 Ed., p. 13. 



1883.] CONSTITUTIONALITY OF LEGAL-TENDEE LAW. 261 

by the constitution, we are irresistibly- impelled to the conclu- 
sion/' said Judge Gray, who delivered the opinion of the court, 
" that the impressing upon tlie treasury-notes of the United 
States the quality of being a legal tender in payment of private 
debts is an appropriate means, conducive and plainly adapted 
to the execution of the undoubted powers of Congress, con- 
sistent with the letter and spirit of the constitution, and there- 
fore within the meaning of that instrument necessary and 
proper for carrying into execution the powers vested by this 
constitution in the government of the United States." 

" "Whether at any particular time," added the court, " in 
war or in peace, the exigency is such, by reason of universal 
and pressing demand on the resources of the government, or 
of the inadequacy of the supply of gold and silver coin to 
furnish the currency needed for the uses of the government 
and of the people, that it is, as a matter of fact, wise and 
expedient to resort to tliis means, is a political question, to be 
determined by Congress when a question of exigency arises,^ 

' The Nation remarked, when the dissenting opinion of Judge Miller, in 
Hepburn against Griswold, was delivered, " On the point whether Congress 
or the courts have the right of deciding what means are necessary and 
proper for the exercise of the war power, we suspect most people will agree 
with us in thinking that Judge Miller had the best of the argument. 
Society has become such a complicated machine ; its interests are so vast 
and varied, and delicate ; the influences which affect them so numerous and 
difficult of comprehension, and wars have become so largely contests of 
money, machinery, and scientific skill that there is probably no more difficult 
problem submitted to the human mind in our day than the best means of 
bringing into play the whole of a nation's power of offence and defence. 
How to raise armies in a modern commercial community without fatally 
deranging industry ; how to get money to support them without plunging 
business into confusion and disheartening the people, at a crisis when every- 
thing depends on the people's keeping up its courage, are problems now 



262 FINANCIAL HISTORY OF THE UNITED STATES. [1883. 

and not a judicial question, to be afterward passed upon by 
the courts." Is this decision final ? We have seen how 
speedy was the transformation of the court which looked 
unfavorably on the legal-tender legislation into a court 
which looked on it with favorable eyes. The planet rolls, 
and all thereon and therein changes, and human institu- 
tions and decisions are made, and change, and pass away. 
The decisions rendered by the higher court of our country are 
stamped with some permanence, compared with many of the 
opinions and utterances expressed around them, but even these 
change from generation to generation, as the reasons on which 
they are founded, weaken or wholly disappeai'. Other causes, 
too, contribute toward the change. Judicial decisions are 
annually swept away by legislative enactments. Polities 
sometimes spreads a baneful shadow over courts, and darkens 
the stream of judicial decision, like branches overhanging the 
water. What may be the outcorrie of this decision is hardly 
worth while to prophesy. It may stand for ages, the monu- 
ment of a wisdom more consummate than was realized, either 
by the judges who spoke, the parties immediately aifected, or 
the people who listened, or it may be reversed at a later day 
by the same court, reflecting and recording just as clearly that 
unwritten opinion of the people, who, in every country, and 
in every age, form the supreme tribunal by which every 
question is finally tried and determined. 

which include nearly the whole art of government. There is no way of 
submitting them to the decision of a court of law ; a court which was com- 
petent to pass on them would no longer be a court." — Feb. 17, 1870. 



1865.] EESUJIPTION OF SPECIE PAYMENTS. 263 



CHAPTEE II. 

EESUMPTION OF SPECIE PAYMENTS. 

Whex specie pavment.s were suspended in December, 1861, 
tlie event was as unwelcome as unexpected, and every one 
believed that they would speedily be resumed on the return 
of peace, notwithstanding the example of Great Britain, which 
delayed for seven years after Waterloo was fought. Twice as 
many years were to pass after the close of the civil war before 
the government redeemed its promises, and not until death 
had taken the most prominent character in the financial 
history of the time, and who, if unintentionally powerful in 
causing their suspension, would have rejoiced all the more in 
the return to an honest money and the restoration of the 
national honor. 

When the war closed Mr. JMcCuIloch was at the head of the 
treasury department. He had succeeded Mr. Fessenden at 
the opening of President Lincoln's second term. Five days 
after assuming office he remarked, in a speech to the heads of 
the bureaus wlien they were presented to him : " My chief 
aim will of course be to 'provide the means to discharge the 
claims upon the treasury at the earliest day practicable, and 
to institute measures to bring the business of the country 
gradually back to the specie standard, a departure from which, 
although for the time being a necessity, is no less damaging 
and demoralizing to the people than expensive to the govern- 



264 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

ment." ^ Thus early did he announce his policy, from which 
he never wavered. Not long afterward he addressed a j^ublic 
meeting in Fort Wayne, Indiana, at which he said, " I have 
no faith in a prosperity which is the effect of a depreciated 
currency, nor can I see any safe path for us to tread but that 
which leads to specie payments. We have a circulating 
medium altogether larger than is needed for legitimate busi- 
ness ; the excess is used in speculation. The longer the infla- 
tion continues the more difficult will it be for us to get back 
to the soliil ground of specie payments, to which we must re- 
turn sooner or later. If Congress shall early in the approach- 
ing session authorize the funding of legal-tender notes, and 
the work of reduction is commenced and carried on resolutely, 
but carefully and prudently, we shall reach it probably with- 
out serious embarrassment to legitimate business ; if not, v.-e 
shall have a brief period of hollow and seductive prosperity, 
resulting in wide-spread bankruptcy and disaster." 

These utterances of the secretary immediately spread over 

■ April 4, 1865, lie wrote to Henry C. Carey : " You will perceive by the 
statement of the condition of the treasury on the 1st instant that the gov- 
ernment circulation has not been diminished. Whether, or to what extent, 
this circulation will be reduced, depends upon circumstances that cannot 
now be clearly foreseen. I have been, and still am of the opinion, that it 
must be curtailed before a return to specie payments can be effected ; but it 
cannot be denied that the course of the market for the past mouth has been 
such as to justify a reconsideration of the opinions which have been so 
generally entertained in regard to the inflation of the currency. The in- 
creased demand for money, which is the result of the diminution of indiv- 
idual credits, may not have been fully estimated ; and it may turn out that 
no considerable reduction of paper circulation will be needed for the restora- 
tion of the specie basis. At all events, the government will have no inter- 
est in retiring its direct issues if the desired object can be obtained within 
a reasonable time without it." — 1 In. Fu-o. Record, p. 123. 



1865.] RESUMPTION OF SPECIE PAYMENTS. 265 

the country, and were warmly endorsed by boards of trade 
and similar organizations, and the press. The President, too, 
in his annual message, strongly sustained the secretary. Those 
who feared that he might not be in accord with ]\Ir. McCul- 
loch on this great question were relieved when he declared 
that it was our first duty to prepare in earnest for our recovery 
from the ever-increasing evil of an irredeemable currency 
without a revulsion, and yet without untimely procrastination. 
"To aid our fellow-citizens in the prudent manageiuent of 
their monetary affairs, the duty devolves on us to diminish by 
law the amount of the paper money now in circulation. Five 
years ago the bank-note circulation of the c(juntry amounted 
to not more than .^200,000,000 ; now the circulation, bank 
and national, exceeds $700,000,000. The simple statement 
of the fact recommends more strongly than any words of mine 
could do the necessity of our restraining this expansion. The 
gradual reduction of the currency is the only measure that 
can save the business of the country from disastrous calami- 
ties ; and this can be almost imperceptibly accomplished by 
gradually funding the national circulation in securities that 
may be made redeemable at the pleasure of the government." 
In Mr. ]McCulloch's report, which was made public simul- 
taneously with the President's message, large space was de- 
voted to the subject of resuming specie payments. " The issue 
of United-States notes as lawful money was a measure expe- 
dient doubtless, and necessary in the great emergency in which 
it was adopted," but which no longer existed. He did not 
recommend the immediate repeal of the legal-tender laws, 
because such a course " would be unwise " and " likely to 
affect injuriously the legitimate business of the country." As 
the interest-bearing legal-tender notes " were intended to be a 



266 FINANCIAL HISTOEY OF THE UNITED STATES. [1865. 

security rather than a circulating medium," the secretary rec- 
ommended Congress to declare that after their maturity they 
should cease to be a legal tender, because " such a declaration 
would aid the government in its eiforts to retire them," 
and " would be neither injurious to the public nor an act of 
bad faith to the holders." 

The objections to reducing the amount of the currency were 
stated and answered by the secretary, and may be as fitly con- 
sidered at the outset of tliid chapter as at any other place. 
The first objection was that prices would be reduced, and this 
effect would be injurious, if not disastrous, to trade, and quite 
likely precipitate a financial crisis. To this objection the sec- 
retary replied, that jjrices of articles of indispensable necessity 
were already so high as to be severely opi^ressive to con- 
sumei's, Of;pecially to persons of fixed and moderate incomes, 
and to the jxjorer classes. Not only the interest, but the 
absolute necessities of the masses required that the articles 
needed for their use should decline. With respect to trade, no 
reason existed for ajjprehending that Congress would adopt 
any policy that would cause so rapid a reduction of prices as 
to produce embarrassment. Moreover, a return to specie pay- 
ments would not bring prices back to those of former years. 
On the other hand, the longer contraction was deferred the 
greater must the fall eventually be, and the more serious the 
consequence. 

To the objection that a contraction of the currency would 
reduce the public revenue, the secretary admitted that " this 
might be the immediate effect, but it would be temporary 
only." That the proposed policy of contraction would 
endanger the public credit by preventing funding, was an 
objection for which Mr. McCuUoch could perceive no sub- 



1865.] RESUMPTION OP SPECIE PAYMENTS. 267 

staotial ground. He could not understand how the process 
of funding was likely to be aided by the continuance of prices 
on their present high level, or how the credit of the govern- 
ment was to be restored by the perpetuation of an irredeem- 
able currency. 

He next considered the objection that such a policy would 
compel the government and the people, who were iu debt, to 
pay in a dearer currency than that in which their debts were 
contracted. " So far as individual indebtuduess is regarded," 
said the secretary, " it may be remarked, that the people of 
the United States, if not as free from debt as they were six 
mouths ago, are much less in debt than they have been in 
previous years, and altogether less than they will be when the 
inevitable day of payment comes around, if the volume of 
paper money is not curtailed. A financial policy which would 
prevent the creation of debts, and stimulate the payment of 
those already existing, so far from being injurious, would be 
in the highest degree beneficial." Such was the answer of the 
secretary to this objection. It certainly was not very satisfac- 
torv, but, perhaps, a better one could not be made. This was, 
in truth, the weightiest of all objections to improving the 
value of the currency. During all the years of suspension 
this was the one on which the opponents to a return to the 
former system most securely built their arguments. They 
believed that a reduction of the currency meant lower prices, 
and this, in turn, enhanced the difficulty of debt-paying. If 
a farmer owed a thousand dollars, it was easier for him to get 
the money to pay his debt, if he sold his wheat for one dollar 
and a half per bushel than if he sold it only for one dollar. 
Nothing could be clearer. To reduce the currency and 
diminish prices meant bankruptcy to many, and debt-paying 



268 FINANCIAJL HISTORY OF THE UNITED STATES. [1866. 

more difficult. In diluting the currency a vast amount of 
property was transferred from the creditor to the debtor with- 
out an equivalent; so in the appreciation of the currency a 
vast amount would be transferred from the debtor to the 
creditor without an equivalent if the debts were subsequent to 
inflation. The getting of means to carry on a war by the issue 
of a forced currency is a tax of the most serious kind. The 
creditor pays a portion of it in the way of receiving less for his 
debt than he loaned. While the currency is undergoing the 
process of inflation, or depletion in value, merchants often 
charge more for their goods to cover losses by the change, 
which is paid by purchasers, and another portion of the 
tax is finally paid by the debtor class Avhen the currency 
improves in value and prices decline. The entire tax is 
tremendous. The debtor class clearly seeing the larger burden 
they would be obliged to bear if the volume of currency were 
contracted and prices declined, stubbornly opposed contrac- 
tion. It is true that many old debts had been paid during 
the war, but many had not, while new ones had been con- 
tracted, and the people individually and in a corporate capacity, 
and especially many of the municipal corporations and the 
States of the Union, were far more deeply indebted than on 
the day of suspending payments. 

Two more objections were stated and answered by the sec- 
retary, to which a short space may be given. The first was 
that a reduction of the government-notes would embarrass the 
national banks, if it did not force them into liquidation. To 
this he replied that it was better that the banks should be 
embarrassed then tlian bankrupted hereafter. Their business 
and customers were then under control. What would be 
their condition in these respects if the expansion continued a 



1865.] EESUMPTIOX OF SPECIE PAYilENTS. 269 

year or two longer it would not be difficult to predict. The 
conservative banks of tlie country, whatever might be said 
of the others, unanimously favored curtailment of the currency 
with a view to an early return to specie payments. 

The other objection was, that contraction by reducing exports 
and increasing imports would reduce the rate of foreign 
exchange. It was doubtless true, said the secretary, that a 
high rate of excliange did, for a time, increase the expurtatiou 
of our productions and diminish the importation of foreign 
articles, but this advantage was much more than counter- 
balanced by the largely increased expenses of the government 
aud of the people, resultiug from the very cause that produced 
the high rate of exchange. Besides, this apparent advantage 
no longer existed. The advance of prices in the United States, 
notwithstanding the continued high rate of European exchange, 
was now checking exports and inviting imports, and creating 
a balance in favor of Europe that was likely to be tlie greatest 
obstacle in the way of an early resumption of specie payments. 

The secretary, therefore, recommended Congress to declare 
that the compound-interest notes should cease to be a legal 
tender from the day of their maturity, and also to authorize 
him to sell bonds of the United States, bearing interest at six 
per cent or a lower rate, and redeemable aud payable at the 
convenience of the interest of the government, for the purpose 
of retiring the compound-interest, and United-States notes. 

The secretary then added, that the " process of contraction 
can not be injuriously rapid; and that it will not be necessary 
to retire more than one hundred, or, at most, two hundred 
millions of United-States notes, in addition to the compound 
notes, before the desired result will be attained. But neither 
the amount of reduction, nor the time that will be required to 



270 FIXANCIAL HISTORY OF THE UNITED STATES. [1866. 

bring up the currency to specie standard, can now be estimated 
with any degree of accuracy. The first thing to be done is to 
establish the policy of contraction. When this is effected, the 
secretary believes that the business of the countiy will readily 
accommodate itself to the proposed change in the action of the 
government, and that specie payments may be restored without 
a shock to trade, and -^vithout a diminution of the public reve- 
nues, or of productive industry." 

The House shortly afterward passed a resolution almost 
unanimously concurring in the views of the secretary of the 
treasuiy, concerning the necessity of contracting the currency, 
with a view to as early a resumption of specie payments as 
the business interests of the country would permit, and pledged 
" co-operative action to this end as soon as practicable." On 
the 1st of February, the Committee of Ways and Means 
reported a bill authorizing the secretary of the treasury to 
receive treasury-notes or other obligations, whether bearing 
interest or not, in exchange for bonds. He could sell them 
in the United States or elsewhere without limitation in amount 
or rates for lawful money, treasury-notes, certificates of indebt^ 
edness, or on deposit of other representatives of value. The 
bill was an amendment to an Act passed on the last day of the 
previous session. 

A long and warm debate followed. Mr. Morrill began it 
by saying that the present bill was " but a patch on an old 
garment." The Act of INIarch 3d, 1865, to which this was an 
amendment, authorized the funding of interest-bearing obli- 
gations, and that authority was expanded by the present bill 
by including the non-interest-bearing obligations. The new 
bill conferred large powers, but they were all confined to 
exchanging a short debt for a long one, or to the conversion 



1866.] RESUMPTION OF SPECIE PAYJIENTS. 271 

of an old debt into a new one, ^vhen that could be done to 
our advantage. Our whole debt could not be increased under 
the new bill a single dollar. " Those who fear rash attempts 
at an early resumption of specie payments," he continued, 
" should be quieted ; it is simply impossible to take at once 
any very long strides in that direction. This is a process 
only to be successfully accomplished by gradual and persistent 
effort. Only while currency is plentiful and cheap is it any 
object to exchange it for bonds ; make it scarce and dear and 
it will not be done. 

" It is true that some hostility to a return to specie pay- 
ments is manifested in certain quarters. It is to be expected. 
Any system proposed by the secretary of the treasury, or any 
bill proposed by Congress not exhibiting facilities by which 
the money-changers may continue their rapid gains, will meet 
with noisy clamor on the pretence of injury to the general 
interests of trade and commerce, and will be dexterously 
thwarted unless we place the secretary where, to use those 
terms which military operations have made familiar, he ^vill 
be master of the situation ; that is to say, to fund all of our 
matured indebtedness and debts soon to mature at lower rates 
of interest than what we are now paying, and with longer 
periods of time for payment." 

Mr. Hooper, of Massachusetts, sustained the bill. His 
speech was perhaps the strongest delivered on the subject, 
though Mr. AYentworth's, of Chicago, was vigorous and con- 
tained far more than the usual quantity of historical informa- 
tion for the regulation congressional speech. Mr. Hooper had 
thoroughly studied the principles and history of money, and 
had written several elaborate monographs, which were favor- 
ably regarded by those who professed to know most about 



272 FINANCIAL HISTOKY OF THE UNITED STATES. [1866. 

the subject. He had been a successful Boston merchant, and 
was one of the earliest members of Congress to favor the 
issue of legal-tender notes, and tlie creation of the national 
banking system. On this occasion he said that " -n-hatever 
differences of opinion may exist in regard to what had been 
done, no one could doubt now, the -war being ended and the 
government having ceased to be a borrower of money, that 
the important question to be considered was how to restore 
the currency to a sound and stable condition at the earliest 
pi'actical time with the least possible disturbance of the values 
of jn'operty and of tlie substantial interest of the industry of 
the country." He tJien declared that " the only honest and 
practical way in which the paper money of the country can 
be restored to a sound condition, and made equal in value to 
the money of other countries with which we are connected 
by commerce, is by a gradual reduction of its amount until 
what remains shall circulate as the equivalent of coin, and can 
be e()u^•erted into coin at the option of any holder. ^Vs soon 
as the contraction of the amount of legal-tender notes is com- 
menced in earnest, and no other j^aper monc}- alloM'ed to be 
substituted for it, the premium on gold will decline and 
foreign exchanges will be in our favor. If the public under- 
stand and believe that the contraction is to be continued until 
the paper money remaining in circulation, whether issued by 
the government or by tlie banks, is at par with coin, the 
export of specie will cease, the product of our gold and silver 
mines will be retained in tlie country, and gold will be 
imported from Europe. ^Yheiiever the paper money is at 
par with coin, both will tlien circulate together again and 
constitute the money of the country." 

Mr. Kelley, of Pennsylvania, maintained that contraction 



1866.] RESITJIPTION OF SPECIE PAYMENTS. 273 

Avas not the way to resume specie payments. It was tlie way, 
" after a brief struggle by a double-quick march, to bank- 
ruptcy." There was another and better method of resumption. 
" Promote the development of our resources and stimulate our 
industry by repealing taxes to the amount of one hundred and 
fifty or two hundred million dollars per annum, promote the 
recuperation of the South, and give employment to the dis- 
charged soldiers of the North," and he prophesied that " at 
the end of five years you will find the specie-owning citizens 
of the country will have bought from the banks their bonds, 
and the bullion-owning citizens of the country will have depos- 
ited in the banks specie ; at any rate, at the end of ten years 
the process of fostering our industries, developing our re- 
sources, and retaining in the country some of our vast mineral 
wealth, will bring us to the resumption of specie payments 
naturally, and without disturbing any branch of business." 

Mr. "Wentworth, who strongly favored the bill, when deliv- 
ering his speech, quoted from a letter written by " one of the 
oldest and wealthiest bankers " in the country, which cor- 
rectly reflected the opinion of the national banks on this 
question. " Pay no attention," said the writer, " to outside 
pressure so far as the national banks are concerned. We have 
paid for no pamphlets, no money articles in newspapers and 
no lobby. It is the speculator, the shoddies, the lame ducks, 
that are belaboring Congress. The national banks will be 
ready for specie payments a.s soon as the secretary of the 
treasury is. Give him a good strong bill, and have no 
fears. Pie can not affijrd to quarrel with solvent banks, nor 
they with him. There is no way to separate their legitimate 

interests." 

Mr. Wentworth remarked that one class of men were " lob- 

18 



274 FINANCIAL HISTOEY OF THE UNITED STATES. [1866. 

bying against specie payments that surprised him very much," 
— tlie importers. They knew that unredeemable money begot 
extravagance, and that men who became suddenly rich by 
speculating on other people's necessities at once outgrew the 
plainness of American manufactures. The suddenly rich, 
especially if they were illiterate, were the best patrons of im- 
porters. " Such persons rejoiced in diamonds and laces, can 
drink no liquors without a certificate of their importation, and 
always travel in their best clothes, fresh from a foreign 
market. These importers think that a bloated currency 
bloats the fashions." 

Mr. Boutwell thought that the course of things ought to go 
on without active interference. In the natural development 
of events we should resume specie payments as early as was 
convenient to the business interests of the country. He 
believed, while we should not increase our circulation, that 
we should wait until another harvest had been gathered in, 
and until the results of that harvest had been made a part of 
the convertible property of the country before any legislation 
should be attempted in the way of enforcing specie payments. 
In other words, Mr. Boutwell desired that the government, 
like Horace's peasant, should wait on the bank of the river until 
it passed away before crossing. Had the government done so, 
we fear that it would have waited permanently ; for the paper 
money, like the river so gracefully described by the Roman 
poet, would have continued to flow for ever, though with 
increasingly destructive power. 

The debate revealed a strong opposition to the negotiation 
of bonds abroad, and stronger yet to granting the secretary so 
much authority to contract the currency. The bill was 
amended during the debate by withdrawing authority to sell 



1866.] RESUMPTION OF SPECIE PAYJIENTS. 275 

the bonds abroad and make them payable in the currency of 
foreign countries and afterward recommitted. When again 
reported, the committee oifered as a proviso, " of United- 
States notes not more than ten millions may be retired 
and cancelled within six months from the passage of this 
Act, and thereafter not more than four millions in any one 
month." 

At the time of reporting this amendment, Mr. Morrill 
read a letter from the secretary of the treasury, in which he 
stated in the clearest language the vast importance to the 
interests of the country, the welfare of the people, and the 
credit of the nation of adopting such a financial policy as 
would prepare the way for a return to specie payments. 
When this could be brought about would depend on the con- 
dition of national industry and the trade relations between the 
United States and foreign nations. The secretary added, " the 
apprehensions which exist that if power is given to the secre- 
tary to retire United-States notes the circulation of the country 
would be ruinously contracted is without any substantial 
foundation. If no reliance can be placed on the discretion 
and carefulness of the secretary, the very condition of the 
finances of the country will present such a reduction of the 
currency as will make either a tight money market or a 
depressed business. Authority to reduce the currency will go 
verj' far to prevent the necessity for a reduction." 

As thus amended, the bill passed the House by a vote of 
eighty-three to fifty-three, forty-seven members not voting. 

The Finance Committee of the Senate reported the bill 
without amendment. The principal opponent was Mr. Sher- 
man, who did not perceive the necessity of conferring on the 
secretary of the treasury " the vast powers " mentioned in the 



276 FINANCIAL HISTORY OF THE UNITED STATES. [1866. 

bill. If the proviso restricting the powers of the secretary to 
contract the currency would accomplish the purpose designed 
by the House, he would cease all opposition ; but he knew it 
would not, for the very obvious reason that there was no 
restraint upon the power of the secretary of the treasury to 
accumulate legal-tender notes. He might retire two hundred 
millions of legal-tender notes by retaining them in his pos- 
session without cancellation, or sell bonds for legal tenders and 
hold these in his vault, thus retiring them from the business 
of the country. He might, therefore, without violating the 
terms of the bill, contract the currency according to his own 
good-will and pleasure. " My own impression is," added Mr. 
Sherman, " that the secretary of the treasury, in carrying out 
his known policy, Avill do so. I believe he will contract the 
currency in this way." He had, at that time, in the treasury 
$60,000,000 in currency, and $62,000,000 in gold, a larger 
balance than had ever been kept until a very recent time. 
" What is the object in accumulating these vast balances ? " 
inquired the senator. " Simply to carry out his policy of 
contraction. With this power of retaining in the treasury the ■ 
money that comes in, what does he care for the limitations put 
upon this bill by the House of Representatives ? " Neverthe- 
less, only six senators voted with Mr. Sherman, his colleague, 
the Michigan and Minnesota senators, and Mr. Howe, of 
Wisconsin. 

The bill passed the Senate as reported;' thus was moulded 
into legislation Mr. McCuUoch's plan for retiring the currency 
and preparing for specie payments. It was objected that the 
Act would make a wider separation' between the greenbacks 
and the bonds, and that the better way would be to restore 
' Act, April 12, 1866, 39 Cong., first session, chap. 39. 



1S66.] RESUMPTION OP SPECIE PAYMENTS. 277 

the original section, ^vhicll provided for funding the legal- 
tender notes into bonds. Senators Sherman and Chandler 
sought to engraft that provision into the bill, but failed. 
Congress, while providing for funding all the interest-bearing 
notes into bonds, adopted the policy of contraction for retiring 
the greenbacks from circulation. Thus the law provided for 
satisfying the bondholder, but left the holders of the green- 
back in much uncertainty. Mr. Sherman afterward said in 
the Senate, that " if this Act had contained a simple provision 
restoring to the holder of the greenback the right to convert 
his note into bonds, there would have been no trouble. Why 
should it not have been done ? Simply because the secretary 
of the treasury believed that the only way to advance the green- 
backs \^'as by reducing the amount of them ; that the only 
way to get back to specie payments was by the system of con- 
traction. If the legal-tender notes could have been wedded 
to any form of gold bond by being made convertible into it, 
they would have been lifted by the gradual advance of our 
public credit to par in gold, leaving the question of con- 
traction to depend upon the amount of notes needed for 
currency." ^ 

The interest-bearing notes during the year ceased to 
circulate. As they were a legal tender, they could be used as 
a lawful reserve for the banks, and were thus used from the 
beginning, crowding a similar amount of legal-tender notes 
into circulation. As the banks took out more and more 
circulation, and increased their deposits, they were obliged to 
hold a large amount of legal-tender notes as a reserve, which 
had quite the same effect as would the keeping of them in the 
vaults of the treasury. They also held a large amount of com- 
1 Speech in Senate, Jan. 16, 1874. Speeches, p. 419. 



278 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

pound-interest notes which would soon mature. To provide 
for their payment the issue of |50,000,000 of three-per-cent 
certificates was authorized, payable on demand in lawful 
money.* Although the ■ reduction of the legal-tender notes 
continued during the year, so far as the new certificates dis- 
placed notes which had been kept as a reserve there was no 
diminution in the quantity of circulation. The aggregate 
amount of interest-bearing notes decreased rapidly. 

The secretary continued to reduce the legal-tender notes, 
though not with regularity. When Congress convened in 
December, 1868, a considerable stringency existed in the 
money market. The price of commodities had declined, and 
opposition to further contraction was loud and general.^ 

•March 2, 1867. 

' Mr. McCulloch wrote, in Augu§t, 1875 : " Every business man knows 
that there are seasons of the year in which large curtailment of a redundant 
currency can be made without disturbing the business of the country, while 
at other seasons small curtailments may produce injurious effects. I give 
it as my mature judgment that if the secretary had been unrestricted in 
regard to the time and amount of the withdrawal of the legal-tender notes 
from circulation, and the publication of the monthly reports had been 
discontinued, a hundred millions of these notes might have been retired 
in the course of a year, without the people being the wiser for it or business 
being deranged by it." He then related the following incident : " During a 
temporary stringency in Wall street, the sub-treasurer in New York, Mr. 
Van Dyck, expressed his apprehensions that if the next monthly statement 
showed that the usual curtailment had been made a panic would occur. 
Deeming it wise to give heed to the warning he sent for General Spinner, 
the U. S. treasurer, and said : ' General, our friends in New York advise me 
that there will be a panic in Wall street if your next statement shows that 
the usual monthly curtailment has been made. You have the four millions 
for cancellation on hand, and have no occasion to use them. The law only 
authorizes their cancellation ; it does not require it. Let them remain 
where they are, so that your statement will show them to be cash on hand, 



1868.] EESUMPTIOX OF SPECIE PAYMENTS. 279 

Secretary McCulIoch evidently feared that his policy M'as 
about to be overthrown. He had hoped at one time that 
Congress would fix that year for resuming specie payments ; 
the event was not to come in his administration. 

His report contained his last great argument for an honest 
money and for keeping the public faith. The opposition to 
contraction made a decisive impression on Congress, and in 
February of the next year the secretary's authority to retire 
legal-tender notes was suspended. The amount in circulation 
was §356,000,000. At the close of that fiscal year only 
$28,000,000 of compound-interest notes remained unpaid ; 
the amount of three-per-cent certificates, howe\'er, had been 
increased to §75,000,000.' 

The bill to suspend the retiring of the legal-tender notes 
was reported to the House by Mr. Schenck, chairman of the 
Committee of ^Yays and jNIeans, on the 5th day of December,^ 
and was recommitted. Two days afterward it was reported 
back with the unanimous approval of the committee, who 
demanded the previous question on the passage of the bill. 
No debate was permitted. Mr. Garfield told the chairman 
if he would allow " four hours for the discussion of this great 
financial question," those opposed to the bill would be content. 
The opponents of the bill tried to offer an amendment limiting 
the time for suspending contraction until the 1st of May, but 

and not notes withdrawn from circulation.' This course was pursued, and 
although the four millions had been actually retired and were never to see 
daylight again, except to be counted and burned, the report at the end of 
the month indicated that the depleting hand of the secretary had been 
stayed. Wall street was at once in good humor again, and the operators 
for a rise were relieved."— iV. Y. Tribune. 
ijuly25, 18G8. '^^67. 



280 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

Mr. Schenck would not give way for amendments. No 
opportunity, therefore, was given, either for debate or for 
amendment, and so the bill immediately passed by a vote of 
one hundred and twenty-seven to thirty-two, twenty-eight not 
voting. 

In the Senate the bill was debated at some length, though 
its passage was certain from the first. Only four voted against 
it.^ Mr. Sherman was the chief supporter of the bill. The 
secretary had not redeemed any notes for a considerable period, 
and liad announced that he should not continue the policy 
of contraction so long as the business of the country remained 
in its present condition. There was no need of passing the 
bill ; nevertheless, Mr. Sherman favored it because the public 
would be assured that no further contraction could take place. 
From all parts of the country complaints were heard of de- 
pression and paralysis in business, and many of those who 
suffered wei'e certain that contraction of the currency was 
the cause. Without considering the reserve held by the banks, 
the currency had been contracted $142,439,958. 

On the 31st of March, 1866, the amount of outstanding legal- 
tender notes was ' . . $422,424,007 

One- and two-years' treasury-notes ..... 11,397,870 

Three-years' compound-interest treasury-notes . . . 179,001,301 

Old demand-notes 325,245 

Fractional currency 28,068,952 

National bank circulation 248,880,000 

State bank circulation 32,800,865 

The total amount $922,898,241 

The amount of bank reserve held 193,543,649 

Total in circulation $729,354,592, 



' Act, Feb. 3, 1868, 40 Cong., second session, chap 5. 



1868.] KESUMPTION OF SPECIE PAYMENTS. 281 

On the 31st of December, 1868, the amount of legal-tender 

notes outstanding was $356,000,000 

Three-yeare' compound-interest notes 94 093 830 

Old demand-notes 159 X27 

Fractional currency 31 735 733 

National bank circulation, Jan. 6 294 377 390 

State bank circulation 4 092 153 

The total amount $780,458,283 

Bank reserve 167,960,366 

Total in circulation ' . $612,497,917 

To what extent the payment or conversion of the five-per-; 
cent treasury-notes, which were due in December, 1865, and 
the compound-interest and 7.3 treasury-notes, which were due 
two and three years later, and aggregated in amount $1,035,- 
548,042, contracted the circulating medium is an unsettled 
question.i When Mr. Morrill, in 1866, included $154,926,910 
of compound-interest notes in " the amount of circulating 
currency," Mr. McCulloch criticised him, saying, that if he 
intended to convey a true idea of the amount of paper cur- 
rency really in circulation, and which directly operated to 
cause high prices, he made a serious mistake in including com- 
pound-interest notes as forming part of the circulating me- 
dium. Five-twenties and Erie stock might as justly have been 
included. Neither afTected the volume of currency less than 
did the compounds, the price of which ranged above one per 
cent premium with the accrued interest. They were sought 
for investment, and there was probably not a single note that 
was then used as currency. Several years afterward, Mr. 
McCulloch wrote, " It is undoubtedly true that all these tem- 
porary securities, when first issued, did, to some extent, swell 
' Resumption of Specie Payments, Mis. Doc, 45 Cong., second session ; 
Views before Com. on Banking and Currency, 1874. 



282 FINANCIAL HISTORY OF THE UNITED STATES. [1871. 

the volume of currency, but this was when enormous sums 
were r€(|uired for the payment of soldiers and other creditors 
of the government. The fact that all of them were paid, or 
funded, at or before maturity, without any complaints of con- 
tractiou, proves conclusively that whate.ver purposes they may 
have subserved in 1864, and the early part of 1865, they were 
so held, long before they were retired, that their payment or 
conversion into bonds in no manner affected the money 
market." ^ 

In 1870" the banks were authorized to increase their circu- 
lation to the amount of fifty-four millions. As, however, an 
equivalent amount of the temporary loan certificates were to 
be redeemed, the road to specie payment was not changed by 
that event. In October of that year, Mr. Boutwell, who had 
succeeded Mr. McCulloch at the opening of President Grant's 
administration, issued $1,500,000 legal-tender notes to relieve 
a stringency in Wall street. He was silent on the subject in 
his annual report. Others, though, were not, and his course 
was not generally approved. The gamblers in ^Vall street, 
who wore relieved by the unexpected supply of money, were 
delighted, while the injured were shocked by Mr. Boutwell's 
conduct. A long observance of the high moral code by 
which they had conducted their unlawful business had ren- 
dered them very sensitive to every kind of public interference 
with it. This occasioned no surprise, for in all ages and 
countries criminals have disliked law and halters. On either 
of these two classes, therefore, there Avas not the slightest 
reason for wasting sympathy, and it was a new and humiliat- 
ing spectacle for the secretary of the treasury in his official 

1 Oct. 3, 1878. N. Y. Tribune. 

^ Act, July 12, 41 Cong., second session, chap. 252. 



1873.] RESUMPTION OF SPECIE PAYMEXTS. 283 

capacity to go to the relief of a party of gamblers. This was 
bad eoougli, but Dot the worst. The people began to realize 
clearly what a dangerous thing was a national currency, if the 
head of the treasury department had any authority or control 
over the expansion or contraction of it. Congress, however, 
took no decisive action about the matter. The next year 
Mr. Boutwell issued a larger amount, $4,637,250. The fire 
of public disapproval on him then was so well directed that he 
returned $3,481,541, and his successor speedily retired the 
remainder. Mr. Boutwell, having been elected to the Senate, 
was succeeded' by the first assistant secretary of the treasury, 
]Mr. Eichardson, also of Massachusetts. Hardly had Mr. 
Boutwell retired ^vhen a financial cyclone struck the country.^ 
Prices suddenly went down, great houses failed. Wall street 
raged like a maelstrom. The new secretary was besought to 
come to the rescue. He did so, issuing more legal-tender notes 
in payment of bonds purchased.' In his report- he defended 
himself for issuing them on the ground that " Congress had 
authorized during the war the issue of $400,000,000, beside 
§50,000,000 if needful, to pay the banks and others M^ho 
had temporarily deposited money with the government, and 
that although the currency had been contracted under the law 
of March, 1866, to $346,000,000, yet the law authorizing the 
issue of the maximum of §400,000,000, had never been re- 
pealed." In view of the uncertainty which existed in public 
sentiment about the right of the secretary of the treasury to 

1 March 17, 1873. 

'^ See Horace White's account of the panic, 26 Fortnightly Kev., p. 810. 

' He telegraphed to the President, Sept. 24, " If you concur, I would limit 
the amount to about $1 2,000,000. I do not think it is well to undertake to 
furnish from the treasury all the money that frenzied people may call for." 



284 FINANCIAL HISTORY OP THE UNITED STATES. [1874. 

issue United-States notes in excess of the minimum of $356,- 
000,000/ he recommended Congress to settle the question by 
a distinct enactment. " Until that is done," he said, " when- 
ever there is a stringency in the money market there will 
continue to be a pressure upon the treasury department, by 
those who favor a policy of expansion, to increase the issue 
of notes to the maximum, by the purchase of bonds or other- 
wise ; while, on the other hand, those who conceive that the 
piiblic interests will be better served thereby will bring equal 
pressure to keep the issue down to a minimum." In his 
opinion it was unwise to require the amount in actual circula- 
tion to be above the present minimum.^ 

Congress acted. On the 23d of IVIarch, the House voted 
on three propositions. The first fixed the amount of the 
legal-tender notes at $356,000,000, which was voted down by 
a large majority, and by a nearly similar vote the second 
proposition, which fixed the amount at $382,000,000, the 
amount then outstanding, ]\Ir. Richardson having increased 
the amount $26,000,000. The third proposition prevailed, 
which fixed the amount at $400,000,000. The action of the 
secretary did not cause so much discussion in Congress as 
elsewhere. The inflationists approved and those who favored 
resumption condemned his course. The country was in the 
throes of hard times ; many had failed, many more were 
financially crippled. Debtors were in favor of stopping con- 

' Pres. Grant said, in his message vetoing tlie inflation bill : " The forty- 
four millions have ever been regarded as a reserve, to be used only in case 
of emergency, such as has occurred on several occasions, and must occur 
when, from any cause, revenues suddenly fall below expenditures." — April 
22, 1874. 

^ Senate Report, No. 275, 42 Cong., third session. 



1874.] RESUMPTION OP SPECIE PAYMENTS. 285 

traction and of issuing more money ,^ believing that such a 
policy would result in advancing prices and in lessening their 
burden. Nor were they mistaken. When it is remembered 
how heavy their burden was, and how it constantly increased 
after the panic of 1873 for six anxious years, should any one 
wonder why the way toward specie payments was traveled so 
slowly ? 

Remembering these things, it is easy to explain why 
such a strong feeling existed in Congress against contraction, 
— which fairly reflected opinion outside, — and why, having a 
strong belief in the magical power of paper money to restore 
prosperity, a mighty efPort was made to increase the volume of 
money. Many of the members of Congress were business 
men, and some of them were embarrassed, or feared that they 
or the concerns in which they were interested would be. They 
wanted more money, confident that it would relieve the press- 
ure. It is not our purpose to find out whether they were 
right or wrong ; they strongly entertained their opinions and 
were daily receiving letters from their constituents, and others 
from all parts of the country, begging for a further issue of 
money. They had a vivid recollection of the good times during 
the war, when money had innumerable wings, and they were 
sanguine that an increase would produce an exhilarating effect. 
Had not the issue of a few millions of treasury-notes by the 
secretary of the treasury a short time before stayed or assuaged 
the panic ? Most of this confidence sprang from the debtor 
and depressed classes, who wanted more money not with so 
much hope of making fortunes, as of extricating themselves 
from embarrassment and impending bankruptcy. Whether 
contraction was the untoward cause of blighting their fortunes 
' See House Beport, No. 328, 43 Cong., second session. 



286 FINANCIAL HISTORY OF THE UNITED STATES. [1874. 

or not, they could clearly enough see how much more likely 
they were to extricate themselves from the meshes of their 
indebtedness by selling their products at an advance, than at 
the existing or lower prices. Such was the basis of the move- 
ment to expand the currency during the session of 1873 and 
1874, the first formal expression of which was the passage of 
the bill by the House fixing the amount of legal-tender notes 
at $400,000,000. 

The subject was introduced into the Senate by Mr. AVright, 
of Iowa, whose bill was referred to the Finance Committee, and 
who rejiorted a substitute which, among other things, fixed the 
amount of legal-tender notes at $382,000,000. This was de- 
bated at great length ; meanwhile, the Committee on Banking 
and Currency had reported a bill to the House which provided 
for free banking. The two houses now engaged in an elabor- 
ate discussion of the currency, ploughing and cross-ploughing 
the ground in every direction. Hardly a fresh thought was 
turned in this long and humiliating debate, but the general 
interest in the subject was extraordinary. It was believed by 
many that Congress could speedily end the depression by ap- 
plying the true remedy ; moreover, these believers knew what 
it was and offered it without price. Had all of them offered 
the same remedy. Congress and the country might have had 
more confidence in it ; in truth, the number of remedies offered 
was truly marvelous ; the financier suddenly appeared every- 
where, and, maturing his plan for curing the existing ills at a 
single sitting, forthwith sent it to Washington, with the 
request to a member to introduce it into Congress. Of course, 
the request was heeded. We must give space for the briefest 
mention of them, if no more. They were to establish a uni- 
form and elastic currency, and to reduce the interest on the 



18T4.] RESUMPTION OF SPECIE PAYMENTS. 287 

public debt ; to prohibit banks from receiving or paying inter- 
est ou current deposits ; to improve the currency and reduce 
the interest on the debt ; to authorize free banking with prac- 
tical redemption ; to autliorize the secretary of the treasury to 
loan United-States notes on government bonds. Representa- 
tive Randall introduced four bills relating to the payment of 
interest on deposits of money with national banks, certifying 
checks and other matters ; General Butler to make the volume 
of currency self-adjusting according to the wants of the people ; 
and 3Ir. Clark, of Xew York, a bill to provide a currency 
of coin and paper of equal and uniform value throughout 
the United States. Other bills were for allowing banks to 
circulate notes equal in amount to bonds, and to substitute 
for their present reserves 3.65 currency bonds ; to give 
flexibility to the currency without inflation, and to legalize a 
reserve of §44,000,000 and render the same available for the 
relief of extraordinary financial pressures ; to establish free 
banking ; to fix the maximum of United-States notes and to 
provide for their redemption ; for free banking and the re- 
sumption of specie payments ; to increase the issue of national 
bank-notes and provide for the ultimate resumption of specie 
payments ; to facilitate the resumption of specie payments and 
prevent fluctuation in the value of United-States notes ; to 
authorize the collection of twenty per cent of the duties on 
imports in legal-tender notes ; to establish free banking, reduce 
the interest on the bonded indebtedness of the United States, 
and to retire legal-tender notes ; to provide for the redemption 
of the three-per-cent temporary loan-certificates, and increase 
the national bank-notes ; to amend the Act providing for a 
national currency, establish free banking and other purposes ; 
to authorize the issue of United-States bonds in exchange for 



288 FINANCIAL HISTORY OF THE UNITED STATES. [1874. 

legal tenders ; to provide for free banking and the better 
security of depositors, to hinder usury aud give elasticity to 
the currency, preserve its value to the people, and to prevent 
iinancial panics by locking up the currency ; to strengthen the 
national banks and give elasticity to the currency ; to issue to 
national banks currency equal to ninety per cent of the market 
value of United-States bonds; to provide $25,000,000 of 
additional bank circulation in States having less than their 
proportion; to repeal the Act of 1869, entitled an Act to 
strengthen the public credit ; to provide a free banking law ; 
to provide a general banking law ; also, for the interchange of 
government-bonds and national currency, and the redemption 
of it in coins and interest-bearing notes ; to repeal all laws 
authorizing banking associations ; to substitute United-States 
for national bank-notes. Representatives Cox and Pierce 
introduced bills relating to the resumption of specie payments, 
and other plans were embodied in bills and resolutions intro- 
duced, beside those mentioned. Over sixty different proposi- 
tions, eitlier in the form of bills or petitions, were sent to the 
Senate Finance Committee pertaining tp the currency. 

The Senate finished their discussion first, amended their 
bill by increasing the amount of legal-tender notes to $400,- 
000,000, and authorized an additional issue of $46,000,000 of 
bank-notes, which were to be distributed to banks in the Soutli 
and West. All the banks, however, were required to keep as 
a part of their lawful reserve one-fourth part of the coin re- 
ceived from the government for interest on bonds, nor could 
any bank keep more than one-fourth part of its reserve in the 
banks of the reserve cities, where the entire amount had been 
usually kept at a low rate of interest.' "VVhetlier inflation or con- 
' It passed the House April 14, and was vetoed April 22. 



1874.] EESFMPTION- OF SPECIE PAYMEXTS. 289 

traction would result from this measure could not be pre- 
dicted with confidence. The President clearly perceived the 
true nature of the bill and returned it to the Senate with a 
veto, saying, among other things, that it was practically a ques- 
tion whether the measure would give an additional dollar to 
the irredeemable paper currency of the country or not, and 
whether, by requiring three-fourths of the reserves to be re- 
tained by the banks, and prohibiting interest to be received 
on the balance, it might not prove a contraction. The fact 
could not be concealed that, theoretically, the bill increased 
the paper circulation $100,000,000, less only the amount of 
reserves restrained from circulation by the provision of the 
second section. The measure had been supported on the 
theory that it would give increased circulation. It was a fair 
inference, therefore, that, if in practice, the measure should 
fail to create the abundance of circulation expected of it, the 
friends of the measure, particularly those out of Congress, 
would clamor for such inflation as would give the expected 
relief. The President then said, with the bluntness of honesty, 
" The theory in my belief is a departure from the true princi- 
ples of finance, national interest, national obligations to cred- 
itors, congressional promises, party pledges, — on the part of 
both political parties, — and of personal views and promises 
made by me in every annual message sent to Congress and in 
each inaugural address." 

The veto of the President was hailed with delight by all 
who were opposed to inflation. It will ever be regarded as 
one of the crowning glories in President Grant's civil career. 
It broke the back of the inflationists. The President at that 
moment was at the parting of the ways and turned the gov- 
ernment into the safe one. The battle was the hardest ever 

19 



290 FIXAKCIAL HISTORY OF THE UXITED STATES. [1874. 

fought in Congress by the inflationists, and they were defeated 
by him M^ho had Avon so many victories for tlie Union in the 
field. To that long and splendid list the President added a 
civil victory, the good effects of which were unspeakably 
great. ^ 

The House then passed their bill providing for free bank- 
ing and sent it to the Senate. The bill was briefly discussed; 
for, by that time, all had said and heard enougji. It was 
amended, the free-banking feature was eliminated, §55,000- 
000 of currency were to be withdrawn from the Eastern 
banks for the use of those iu the South, West, and Territories, 
and the amount of legal -tender notes was fixed at §382,000,- 
000. This bill received the approval of the President.^ 
It merely prescribed a more uniform distribution of the bank 
circulation. 

Early the next session an effort was made to secure harmo- 
nious party action on this subject among the Republicans. A 
congressional caucus was held, and a committee were appointed 
who perfected a bill which, though pleasing nobody, Mas the 

' The Nation said : " The difficulties surrounding General Grant in the 
present instance were far greater and naore serious tlian in ordinary times 
— so serious that it was not for a moment supposed, ten days ago, by ninety- 
nine persons out of a hundred, that he would not sign the bill. He was in 
the difficult position of a President who had gained power and considera- 
tion through the support of men who were his inferiors in many solid 
moral and intellectual qualities, who must remain in office, and who must 
also, during those years, have support from some quarter in order to carry 
on the administration at all. . . . He declines to sign it heeause it is de- 
signed as am inflation measure, because he has always been opposed to irre- 
deemable paper money ; and because the party which elected him President 
has over and over again declared itself in favor of a speedy return to a 
currency based on gold." — April 30, 1874. 

» Act, June 20, 1874, 43 Cong., first session, cliap. 343. 



1874.] RESUMPTION OF SPECIE PAYMENTS. 291 

best that could be framed with the prospect of safely running 
the inflation gauntlet. Mr. Sherman introduced the bill into 
the Senate, which was truly of curious and wonderful work- 
manship. If no other part of our financial experience was 
original, this certainly was. 

When introduced, gold commanded a premium of t-\velve 
per cent. Ou the 22d of December, Mr. Sherman discussed 
the measure briefly, others participated, and on the same day 
the bill passed, all the Republican senators voting for it, except 
ilr. Schurz, — the Democrats opposing it. Mr. Schurz insisted 
that positive provision should be made in the bill for retiring 
the notes after redemption, which had been necessarily omit- 
ted to secure the support of Senator Morton and others, who 
had not much faith in the success of any scheme for redemp- 
tion at an early and definite period. The bill flitted through 
the House on the wings of the previous question and became 
a law. 

The Act was entitled "An Act to provide for the resump- 
tion of specie payments." ^ ]\Iany questioned whether it would 
prove effective. The first section provided for the redemption 
of the fractional currency. Silver coins of ten, twenty-five 
and fifty cent denomination were to be coined and issued 
through the sub-treasuries, post-offices, etc., in exchange for 
an equal amount of fractional currency, until the redemption 
of it should be completed. To this section the criticism was 
made that as silver was at a considerable premium compared 
with the fractional currency it would not circulate. Con- 
sequently, " the more put in circulation, the less there would 
be of small change, because the silver would disappear, while 
the fractional paper, to the same extent, would liave been with- 
■ Act, Jan. 14, 1879, 43 Cong., second session, chap. 15. 



292 FINANCIAL HISTORY OF THE UNITED STATES. [187S. 

drawu." The second section provided for the abolition of 
seigniorage and for coining silver. The third section removed 

DO O 

the restriction on the amount of bank-notes, and further pro- 
vided that the secretary of the treasury should retire eighty 
dollars of legal-tender notes for one hundred dollars of those 
issued by the banks. He was directed to do this until the 
amount of legal tenders should be reduced to $300,000,000; 
in other words, he should retire $82,000,000 of legal-tender 
notes if $102,500,000 of bank-notes were issued. Of course, 
the national treasury would lose the interest on the legal- 
tender notes retired, and the national banks would increase 
their circulation, taxation would be increased, and how the 
treasury could be enabled to begin specie payments was not 
clear to many. Was not this expansion ? It was the sub- 
stitution of a larger amount of national bank circulation for the 
other. The law contained another singular feature. The 
legal-tender notes were to be called into the treasury, yet the 
Act was silent about re-issuing or destroying them. Mr. Sher- 
man was asked by Mr. Schurz several times whether the 
secretary would have authority under the bill to re-issue these 
notes. He replied, that the question must be left unsettled. 

The next section of the bill fixed on the 1st of January, 
1879, for resuming specie payments, and in order to do this 
the secretary of the treasury could " use the surplus revenue 
in the treasury not otherwise appropriated, and issue such 
United-States bonds as had been previously authorized to the 
extent necessary for the purpose." 

The measure had many friends and opponents. It was 
clear as noon-day that resumption could be defeated by it if 
the head of the treasury department who should administer 
the law during the next four years were so inclined. Anyhow, 



1875.] RESUMPTION OF SPECIE PAYMENTS. 293 

specie payments were delayed four years with no little uncer- 
tainty concerning the action of the secretary of the treasury 
at the end of that time. Said a very competent tinancial 
critic/ " What of specie resumption do we find in the entire 
Act ? What preparation does it make for securing the object? 
Certainly none at all. Yet the authors of the measure would 
have us believe that the Act provides for the resumption of 
specie payments. For what does it actually provide ? Why, 
that the banks may indefinitely expand their issues ; that 
eighty-two millions of the legal-tender circulation of which 
the treasury now has the advantage may be transferred to the 
national banks to increase their already abundant dividends ; 
that the surplus gold of the treasury, instead of being used as 
it accumulated, shall be reserved until 1879; that the secre- 
tary may then issue all the bonds necessary to redeem the 
balance of the greenback circulation." 

Such was the Act and criticism thereon. Let us next inquire 
what happened. And, first, we may mention that those who 
were in favor of resumption, and who had no faith in the Act, 
or whose faith was weak, sought to strengthen the measure. 
Mr. Bristow was now secretary of the treasury, having succeeded 
Mr. Richardson. After declaring that the legal-tender laws 
were "an artificial barrier to the use of gold and silver, 
tending not only to prevent the flow of gold towards this 
country, but promoting the shipment abroad of our own 
production of the precious metal," he recommended that 
" Congress should abolish the legal-tender quality of the 
notes as to all contracts made and liabilities arising after a 
fixed day."^ The day mentioned was the 1st of January, 

• Amasa Walker, 2 International Eev., p. 272. 
2 Ann. Treas. Bcports, 1874, 1875. 



294 FINANCIAL HISTORY OP THE UNITED STATES. [1873. 

1877.' "Such an Act would not affect injuriously either 
debtors or creditors, but would remove a present obstruction 
to the retention of our gold and silver production, and create 
a demand for the return of gold now abroad, thus promotuig 
final resumption by preparing the country for it." To further 
the purpose of the law, he recommended that authority be 
given to fund legal-tender notes into bonds bearing a low rate 
of interest, and to guard against all danger of too sudden con- 
traction of the currency, the amount that might be reduced 
and cancelled could be fixed at two millions a month. Con- 
gress did nothing. 

The attitude of the Democratic party at this time Avas sadly 
interesting. They had opposed the issue of legal-tender notes 
in war time, but were in favor of issuing them in time of 
peace. It is true the constitutional objection to issuing them, 
which was strongly urged by Democrats for several years, had 
been swept a\\'ay by the decision of the highest legal tribunal. 
While denouncing the improvidence of the Republican party 
in squandering " four times the whole amount of legal-tender 
notes in useless expense without accumulating any reserve for 
their redemption," the Democratic party also denounced the 
resumption clause of 1875, and demanded its repeal.^ In- 
deed, the general verdict of the world is that the party quite 
changed front, with the earnest and unfeigned hope of convert- 
ing enough Republicans to regain power. But if the Demo- 
cratic party were hopelessly stranded on this question, many in 

'This recommendation was regarded with great disfavor by the infla- 
tionists. Judge Kelley declared that such action would be " the greatest 
crime committed since the partition of Poland." The Nation contains an 
excellent article on the subject. Dec. 24, 1874. 

' Platform of Democratic Presidential Convention, 1876. 



187C.] EESUMPTION OF SPECIE PAYMENTS. 295 

the Republican party were dangerously near the sh'oals 
especially in the West, and the most sagacious piloting was 
necessary in managing political bodies, and in devising and 
passing meaningless and inoffensive resolutions and platforms 
to keep in safe waters. It was not easy in many instances to 
distinguish superior wisdom and virtue between the efforts of 
the one party, who were stuck fast and trying to get off, and 
the other, who were trying to keep in the channel. This much 
though, may be said : In the East and extreme West the people 
more generally favored specie payments than in the Western 
and Southern States, and a much greater solidarity of opinion 
was shown by the Republican party at all times in favor of 
resumption than Ijy the other. 

Secretary jMorrill followed by a recommendation quite 
similar to that of his predecessor, that beside authority to 
accumulate gold by the sale of bonds for redeeming the notes, 
" authority be given him from time to time, as he might deem 
expedient and the state of the finances admit, to fund these 
notes into a bond bearing a rate of interest of not more than 
four and one-half per cent, with not less than thirty years to 
run, with such limitations as to the amount to be so funded 
in any given period as Congress, in its discretion, might deter- 
mine." ' On this recommendation Congress took no favorable 
action. 

The first provision of the Act providing for the purchase, 
coinage, and issue of silver to replace the fractional currency 
was soon put into operation. No time was fixed for the issue 
of silver, and the depreciation of currency below gold pre- 
cluded " the probability that silver would remain in circula- 
tion" until the two approached nearer the same level of 
' Ann. Treas. Keport, 1876. 



296 FINANCIAL, HISTORY OF THE UNITED STATES. [1877. 

valuation. When Secretary Morrill rendered his annual 
report, in December, 1876, $22,000,000 of subsidiary silver 
coins had been issued, and 1 13,000,000 of fractional currency 
redeemed. As national bank-notes were issued under the law, 
eighty per cent of legal tenders were retired, and thus the 
work of resumption proceeded. 

An attempt had been made three years before to begin 
resumption in silver, which, however, came to a speedy end. 
The United-States notes had been hoarded so rapidly that 
they rose in value to ninety-three cents in gold, which was 
above the value of the fractional coins then in circulation. 
President Grant, noticing this fact, was surprised because silver 
did not come into the market to supply the deficiency in the 
circulating medium. This was on the 6th of October. On 
the 27th of the month. Secretary Richardson issued a circular 
letter to the several sub-treasury officers, directing them to 
pay out silver coin to public creditors, should they desire it, 
in sums not exceeding five dollars in one payment. The 
amount of silver in the treasury on the 31st of October, 1873, 
was $748,820.77, not a very large sum, surely, with M^hich to 
begin specie payments. This order served as a text for much 
uncomplimentary newspaper writing, and was quietly revoked 
by verbal orders and private letters. 

In March, 1877, Mr. Sherman became secretary of the 
treasury. This was a fortunate event for the successful exe- 
cution of the law. Ever since its enactment his predecessors 
had been faithfully executing it. Messrs. Richardson, Bristow, 
and Morrill had rapidly succeeded to the treasury office, 
yet they were in perfect accord on this subject, and so also 
was the President. Mr. Sherman, it was well known, had 
proposed the plan in the beginning, and was its champion in 



l»■^^.^ EESUMPTION or SPECIE PAYMENTS. 297 

the Senate. The spirit of inflation, though, was not dead ; 
and the air was thick with plans for issuing more paper 
money. From the time of issuing the first legal-tender notes 
to the present, a very large number of persons have advocated 
the exercise of wider functions by the government in furnish- 
ing a currency for the people. If plans were annually 
introduced into Congress, after the close of the war, for 
restoring specie payments, many of which had great merit, let 
us not forget that quite as many plans for postponing specie 
payments and enlarging the currency were brought forth. If 
the Jiat money party failed in the end, it cannot be said of 
them that they were less fecund in ideas and plans than their 
opponents. Thus the paper-money volcano existed, sometimes 
smouldering, at other times burning fiercely. Even now, 
when specie payments were not far off, an eruption broke 
forth. In 1878, a few months before the date fixed for 
resuming specie payments. Congress passed an Act directing 
the secretary of the treasury to retire no more legal-tender 
notes when increasing the national bank circulation, and to 
keep the amount then outstanding in circulation.' The amount 
at that time was $346,681,016. The amount, therefore, of 
the reduction, since enacting the resumption law, had been 
$35,318,984. It should be added, to complete this explana- 
tion, that .510,000,000 of the above amount were . redeemed 
under a joint resolution, passed July 22, 1876, providing that 
silver coin to that amount might be issued for legal-tender 

notes. 

In his first report^ Mr. Sherman settled the much-discussed 
question of the right of the secretary of the treasury to reissue 
legal-tender notes after the time fixed for their redemption. 
> Ees., May 31, 1878, No. 65. ' 1877. 



298 FINANCIAL HISTORY OF THE UNITED STATES. [1878. 

The third section of the Eesumption Act plainly provided for 
the permanent reduction of United-States notes to $300,000,- 
000. The Act contained no distinct legislative declaration 
that notes redeemed after that limit was reached should not 
be reissued, but the Revised Statutes contained the provision 
that " when any United-States notes are returned to the 
treasury they may be reissued, from time to time, as the 
exigencies of the public interest may require." The secretary 
therefore concluded that any notes exceeding that amount in 
the treasury after the 1st of January, 1879, might be "reis- 
sued as the exigencies of the public service require." 

Although authority was given to the secretary of the 
treasury to obtain coin for resumption purposes by selling 
bonds, no step in this direction Mas taken until May, 1877. 
Bonds bearing four and a half per cent interest ^vere then 
sold, $5,000,000 monthly, for the next three months. From 
August to November the same amount of bonds was sold 
monthly, bearing four per cent interest, and in this way 
$40,000,000 of gold were accumulated for redeeming the 
legal-tender notes. On the 11th of April of the next year, 
the secretary sold $50,000,000 of four-per-cent bonds to a 
syndicate of New York and London banks, the proceeds of 
which were used in the same manner.' The $5,500,000 coin 
paid on the Halifax award had been replaced by the sale of 
that amount of four-per-cent bonds, used for redemption 
purposes, making the aggregate thus sold $95,500,000. 
To this was added the surplus revenue from time to time; 
consequently, on the day fixed for resuming, the amount of 

' " The accumulation of coin instead of increasing its price, as was feared 
by many, lias steadily reduced its premium in the market." — Ann. Treas. 
Report, 1878. 



1878.] RESUMPTION OF SPECIE PAYMENTS. 299 

coin on hand, deducting all matured liabilities, was |1 33,- 
508,804.50. 

The secretary had thus accumulated a good stock of coin 
with which to redeem the government-notes. The gold sup- 
ply in the country was increased by producing an enormous 
surplus of grain, meat, and other things, which were sold 
abroad at good prices and largely for gold. This addition to 
our metallic stock was very opportune and rendered resumption 
easy. Indeed, if the balance of trade had been ag-ainst us, 
and gold had been exported in settlement, resumption would 
have been quite impossible. 

To render resumption certain, the co-operation of the banks 
was desirable, nay, necessary. For a year or more before 
resumption took place, the question was often asked, " What 
will the banks do on resumption ? " They held more than 
§125,000,000 of legal-tender notes, and nearly one-third of 
this amount was in the city of New York. On the day fixed 
for resuming, the banks of New York could have presented 
more than §40,000,000 at once, and their action would have 
influenced that of their correspondents, and of other monetary 
institutions of the country, and have weakened the faith of 
the advocates of resumption everywhere. " Such an act, if it 
had not defeated resumption, would certainly have embarrassed 
it, and might possibly have postponed indefinitely its consum- 
mation." "What did the banks do "? 

The expediency of making the assistant treasurer of the 
United States a member of the New- York Clearing-house of 
that city was favored by almost all the banks belonging to 
that association, which was, at that time, composed of forty- 
nine national and thirteen State banks. Subsequently, a 
committee of the association met the secretary, and the follow- 



300 FIKANCIAL HISTORY OF THE UNITED STATES. [1878. 

ing propositions were considered : First, that drafts drawn on 
any bank represented in the clearing-house received by the 
assistant treasurer might be presented to each bank at the 
clearing-house for payment. Secondly, that drafts drawn on 
the assistant treasurer at New York might be adjusted by him 
at the clearing-house, and the balance due from the United 
States might be paid at his office in United-States notes or 
clearing-house certificates. That after the 1st of January, 
payment of checks presented to the assistant treasurer by any 
bank connected with the clearing-house might be made by 
him in United-States notes. This arrangement was adopted, 
beside the following rules for transacting the business of 
the banlvs after specie payments should be resumed, M'hich 
were also adopted by the clearing-house in Boston. " Further- 
more, the banks determine to decline receiving gold coins as 
special deposits, but accept and treat them only as lawful 
nioney ; to abolish special exchanges of gold checks at the 
clearing-house ; to pay and receive balances between banks at 
clearing-house, either in gold or United-States legal tender ; 
and to discontinue gold special accounts on the first day of the 
coming year." ^ When this arrangement was completed and 
made known, all doubt of specie resumption vanished, gold 
declined in value, and that long looked-for day was assured.^ 

1 See action of New- York Clearing-house Oct. 17, 1877, and Nov. 12, 1878. 
Proceedings of Am. Bankers' Convention, Aug. 8, 1878, p. 35. N. Y. 
Tribune, Nov. 13, 1878. Proceedings, 1877, p. 21. 

''■ Gold touched par on the 17th of December. The N. Y. Times of 
the next day contained the following record : At 12.29 o'clock yesterday, 
according to the official record, $10,000 of gold was sold in the gold 
department of the stock exchange (the old gold exchange), at par. This is 
the first sale of gold at par that has taken pUae in this country in sixteen 
years. Tlie room was almost empty at the time the transaction was made. 



1878.] EESUMPTION OF SPECIE PAYMENTS. 301 

Immediately preceding resumption the issue of certificates 
representing gold deposits was discontinued.^ " It was feared 
that parties might present legal-tender notes based upon a 
forty-per-cent reserve, obtain the gold therefor, and immedi- 
ately deposit it for the certificates for which, by law, the 
department was required to hold one hundred per cent."^ 
For more than three years the secretary refused to issue 
them, and not until July, 1882, was the practice renewed. 

For a month before the day fixed for resumption, resump- 
tion had really occurred. On that day, although the banks 
could have demanded $40,000,000 of gold, they took not a 
dollar. At the beginning of the war they parted with their 
gold to aid the government, and now, when resumption was 
accomplished, they were content to take whatever it desired 
to give. 

and so quietly was it accomplished that only three or four persons who 
stood near the register's desk knew anything about it. It was a coincidence 
that the record-book, on which accounts of sales are kept, had so nearly run 
out that all these transactions were recorded by the clerk on the last page 
of the last leaf. Word was sent immediately to the stock exchange, and 
the announcement of each sale was received with vigorous cheers. Follow- 
ing are the highest prices reached by gold in each year, beginning with 
1862, when it was quoted at 102 on Jan. 1 : 

1151 

1151 

119J 

1141 

1171 

115 

107J- 

107 



1862 












. 134 


1871 


1863 












. 152J 


1872 


1864 . 












.285 


1873 


1865 . 












.2331 


1874 


1866 . 












. 167i 


1875 


1867 . 












. 1451 


1876 


1868 . 












. 150 


1877 


1869 . 












. 162J 


1878 


1870 . 












. 123J 




IN. 


Y 


Tribune, 


Dec. 


5, 1878. 


=i Ann. 


Treas. 


Beport, 


1881. 







302 FINANCIAL HISTOBY OP THE UNITED STATES. [1878. 

Previous to the day fixed for resumption, said the secretary 
in his report at the close of the year, United-States notes 
and coin were freely received and paid in private business as 
equivalents.^ Actual resumption was begun at the time fixed 
by law, without any material demand for coin, and without 
disturbance to public or private business. " No distinction has 
been made since that time between coin and United-States notes 
in the collection of duties, or in the payment of the principal, 
or interest of the public debt. The great body of coin in- 
debtedness has been paid in United-States notes at the request 
of creditors. The total amount of United-States notes pre- 
sented for redemption from January 1 to November 1, 1879, 
was $11,256,678. But little coin had been demanded on the 
coin liabilities of the government during the same period, 
though the amount accruing exceeded six hundred million 
dollars." 

The specie standard, thus happily secured, gave an impetus 
to all kinds of business. Many industries, which had been 
depressed since the panic of 1873, revived, while increased 
activity appeared in all branches of production, trade, and 
commerce. Every preparation for resumption was accom- 
panied with increased business and confidence, and its con- 
summation was followed by a revival of productive industry 
unexampled in our previous history.^ 

Having resumed specie payments, could the government 
maintain them? The doubter, who is always present, had 
grave fears. Let a foreign demand be made for coin, and the 
government would be immediately required to respond to the 

' Some payments were made in gold as early . as April, 1878. N. Y. 
Herald, April, 24, 1878. 
2 Ann. Treas. Beport, 1879. 



1878.] RESUMPTION OP SPECIE PAYMENTS. 303 

holders of its notes. Eesumption was therefore regarded by 
this class merely as a fair weather undertaking which could 
not last long. INIr. Sherman's faith was stronger, thouo-h he 
reminded Congress that "the coin reserve ^ must be kept un- 
impaired except by such payments as might be made from it 
in redemption of notes." Those redeemed should be tempo- 
rarily retained, and in a supreme emergency the power exist- 
ing to sell bonds would enable the government to supply any 
possible deficiency.^ 

So that question which had vexed the land for seventeen 
years was ended. England delayed more than four years 
longer than the United States after suspending in 1797. If 
England's delay was longer, the suffering during the sus- 
pension was not so great ; no demoralizing speculation arose, 
no enormous advance of prices. It has been often said 
that the people expected, and were prepared for resumption 
soon after the return of peace, and that if then effected, the 
suiferings of individuals and the nation would have been 
much less than they were. The naked truth is, the people 
were desirous of resumption until they gained some concep- 
tion of the probable cost, and then they slirank from paying 
it, and desperately sought to escape. If the effects of emf)loy- 
ing paper money have sometimes been regarded miraculous, 

' What is the amount of the coin reserve held to redeem the United- 
States notes ? JSTo statute specifies a fixed amount for that purpose. By 
authority of the Eesumption Act, the Treasury Department "sold bonds and 
took coin therefor to the amount of $95,500,000, and put that sum into the 
treasury. This department," said Secretary Folger, in a communication 
to the House in March, 1884, "has always looked upon the sum of the coin 
thus obtained as an especial fund to be kept and relied upon as a means of 
redemption of United-States legal-tender notes." 

' Ann. Treas. Beport, 1880. 



304 FINANCIAL HISTOEY OF THE UNITED STATES. [1878. 

as they were by the Spanish chronicler Agrepieda daring the 
conquest of Granada, the people have learned their true nature 
whenever they have attempted to pay it. In ignorance, 
they imagined they could escape payment by delaying, yet 
this was the costliest way of all. The uncertainty, anxiety, 
and loss caused by maintaining a paper standard of valu- 
ation which Congress every session almost either had changed 
or attempted to change can not possibly be described. Spec- 
ulators alone could rejoice in that dark and troubled time. 
Like the wrecker of a former age, who, lighting his lantern, 
sought to allure an ignorant craft upon the rocks with the 
expectation of plundering and of getting wealth, speculators 
industriously plied their business after the suspension of specie 
payments with a heartless recklessness hitherto unknown. It 
is said that occasionally the ancient wrecker would allure a 
vessel having on board a son or brother, and whose lifeless 
body, tossed up by the condemning sea into the wrecker's face, 
would cause him to turn away ^vith sickening sorrow, and to 
abandon his business. The loss of wealth by speculation, lead- 
ing to suicide and a, dreadful death in other ways, or insanity 
and a life worse than death, has been a common event; but what 
speculator ever abandoned his business in consequence of his 
wrecking of human character? Of all the terrible and im- 
measurable consequences of suspending specie payments, 
none can be compared with the force given to speculation. 
As the violence of the storm can be measured by the height 
and slow subsidence of the waves, so the prevalence and inten- 
sity of speculation are the continuing proof of the magnitude 
of our action in suspending specie payments. 



18G5.] PAYMENT AXU REFUNDING OF PUBLIC DEBT. 305 



CHAPTER III. 

PAYMEXT AND EEFUNDING OP THE PUBLIC DEBT. 

These were two strands to Mr. INIcCulloeh's fiuancial policy 
— the resumptioQ of specie payments, and the funding and pay- 
ment of the debt. Having followed one of these to the end, 
we will take up the other and follow it to the present time. 

After debt-paying began, the cheap criticism was often 
repeated that the government was paying its bonded indebted- 
ness in advance of maturity, and neglecting its overdue obli- 
gations. This criticism, of course, was true. All the unpaid 
requisitions of the war were speedily paid, the interest-bearing 
treasury-notes were funded into bonds running for a longer 
time, while the demand-notes remained unpaid. We were 
therefore guilty of the inconsistency of carefully caring for 
our credit in one direction and as conspicuously neglecting it 
in another. The reason was because we could do the one 
thing without injuring anybody, we could not do the other 
without a heavy sacrifice. 

From the first, the policy of national debt-paying has beeA 
widely favored. Some interests which would be better served 
by continuing the debt have sought to reverse this policy, 
but the voice of the people has been quite unanimous. Mr. 
McCuUoch reflected that opinion correctly in his annual report 
at the close of 1866. "The conviction is becoming fastened 
upon the popular mind that it is important for economy in 

the natir)nal expenses, for the maintenance of a true democracy 

20 



306 FFNAXriAIj HISTORY OF THE UNITED STATES. [1865. 



in the administration of a government, for the cause of good 
morals, and of public virtue, that the policy of a steady 
annual reduction of the debt should be definitely and inexor- 
ably established. Nothing short of this, and that economy in 
the national expenditures which will render it practicable, will 
reconcile the people to the burden of taxation. A national 
debt must ever be a severe strain upon republican institutions, 
and ours should not be subject to it one day longer than is 
necessary. Although incurred in a great struggle for the 
preservation of the government, and therefore especially sacred 
in its character, its burdens are to be shared by those to whom 
it is a reminder of humiliation and defeat. It is exceedingly 
desirable that this, with other causes of heart-burnings and 
alienations, should be removed as rapidly as possible, and that 
all should disappear with the present generation." 

On the 1st of September the debt recorded on the books of 
the treasury reached its maximum, though a large amount of 
war obligations, pensions, etc., were not yet paid. At that 
time the debt consisted of the following items 

-^ Funded debt .... 
Matured debt 



Temporary loan 
-Certificates of indebtedness 

Five-per-cent legal-tender notes 

Compound-interest legal-tender notes 
-Seven-thirty notes 

United-States legal-tender notes .. 

Fractional currency 

Suspended requisitions uncalled for 



Deduct cash in treasury 



¥1,109,568,191 

1,503,020 

107,148,713 

85,093,000 

33,954,230 

217,024,160 

830,000,000 

433,160,569 

26,344,742 

2,111,000 

62,845,907,626 

88,218,055 

12,757,689,571 



' Ann. Treas. Eeport, 1867. 



1865.] PAYMENT AND REFUNDING OF PUBLIC DEBT. 307 

Of this vast sum, §1,270,834,123 consisted of various forms 
of temporary securities. The excess of United-States notes 
above §400,000,000— namely, 8;13,160,569— had been put into 
circulation in discharging temporary loans. The five-per-cent 
notes were payable in lawful money in one and two years 
from December 1, 1873. The compound-interest notes were 
payable in three years from their respective dates, and became 
due between the tenth day of June, 1867, and the 16th of 
October, 1868. At that time^ a very large portion of all 
kinds of national notes were in circulation as currency. 

Of temporar}' securities which were not a legal tender, 
may be mentioned first, the temporary loans, $107,148,713, 
which were payable in thirt}- days from date, after a notice of 
ten days that payment was desired. There were $830,000,000 
(if seven-thirty notes, §30(1,000,000 of which would become 
due August 5, 1867, as many more the 15th of the follow- 
ing June, and §230,000,000 July 15, 1868. The certifi- 
cates of indebtedness would mature at various times between 
the 31st of August, 1865, and May 2, 1867. Moreover, 
§18,415,000 of the funded debt would mature within three 
years. Thus this vast amount must be paid or converted 
into bonds before the 16th of October, 1868. 

In September, therefore, the work of paying and convert- 
ing the debt began. It was needful to make provision for the 
daily maturing debt, and also for taking up, from time to 
time, such portions of it as could be advantageously converted 
into bonds, or paid in currency before maturity, for the pur- 
pose of avoiding the necessity of accumulating large sums of 
money, and of relieving the treasury from the danger to which 
it would be exposed, if a very considerable portion of the 
' See note, page 281. 



308 FINANCIAL HISTORY OF THE UNITED STATES. [18G5. 

debt were permitted to mature, with no other means for pay- 
ing it than that afforded by sales of bonds. The seven-thirty 
notes had been issued with an option to the holders of con- 
verting them into bonds or demanding payment. Of course, 
their action would be determined by the condition of the 
market. " No prudent man," says Mr. McCulloch, " entrusted 
with the care of a nation's interest and credit, would jJermit 
two or three hundred millions of debt to mature without 
making provision for its payment, nor would he, if it could 
be avoided, accumulate large sums of money in the treasurj' 
which would not be called for, if the price of the bonds 
should be such as to make the conversion of the notes prefer- 
alilc to their payment in lawful money." The policy of the 
secretary was therefore determined by the condition of the 
treasury and the country, and by the nature of the debt. 
This was iirst, simply to put and keep the treasury in such 
condition that all claims could be paid on presentation, and 
" strong enough to prevent the success of any combinations 
that might be formed to control its management;" and, 
secondly, to take up quietly in advance of their maturity, by 
])ayment or conversion, such portions of the temporary debt 
as would obviate the necessity of accumulating large cur- 
rency balances in the treasury, and at the same time relieve it 
from the danger of becoming so depleted that more legal- 
tender notes must be issued, or the sale of bonds for whatever 
price they would fetch. 

He therefore recommended Congress to deprive the com- 
pound-interest notes of their legal-tender quality from the 
day of their maturity, and to clothe him with discretionary 
power to sell United-States bonds, bearing not more than six 
per cent interest, and redeemable when conducive to the 



18G5.] PAYMENT AND REFUNDING OP PUBLIC DEBT. 309 

interests of the government, for the purpose of retiring the 
eonipoiind-iuterest Uuitctl-States notes ; and, in addition, the 
grunting of discretionary authority to sell bonds of a similar 
nature, to meet any deficiency during the fiscal year, to 
reduce the temporary loan to such an amount as he might 
deem advisable, to pay the certificates of indebtedness as 
they matured, and retire any portion of the debt maturing 
prior to 1869 that he could advantageously. These recommen- 
dations led to a prolonged discussion, and the financial admin- 
istration of the war \vas revie^^ ed at length. The action of 
Congress was watched with great interest, for all were eacrer 
to know, both here and abroad, what would be done with the 
debt. The time had come when Congress could legislate 
deliberately and without pressure. Mr. Sherman, having 
stated in the debate that the secretary already had power to 
carry out his recommendations without further legislation, 
drew forth from the secretarv the reply that it would be, in 
his opinion, " a national calamity if Congress failed to grant 
to him additional powers, and that it would be very difficult, 
if not impossible, to fund the interest-bearing notes under 
existing laws." He regarded it as a matter of the greatest 
importance to be left with power not strictly defined. If, for 
example, the secretary should be prohibited from selling bonds 
below par, it would be easy, as the market in the process of 
funding must be liberally supplied, for the enemies of the 
government to form successful combinations for keeping the 
bonds at such a price as would prevent the negotiation of 
them. " If his authority in this respect was not limited, no 
such combination Avould be likely to be formed." 

At length Congress amended the Act of March 3d, the 
previous year, and authorized him at his discretion to receive 



310 FIJS^ANCIAL HISTORY OF THE UNITED STATES. [1866. 

treasury-notes or other obligations of the government, whether 
bearing interest or not, in exchange for any description of 
bonds autliorized by that Act ; and, further, to dispose of any 
bonds thus authorized, either in the Unitud States, or else- 
wliere, to such an amount, in such a manner, and at such 
rates as he miglit thinlc advisable for lawful money, or for 
treasury-notes, certificates of indebtedness, or certificates of 
deposit, or other representatives of value which had been or 
might be issued, the proceeds thereof to be used only for re- 
tiring treasury-notes or other obligations issued by Congress. 
Except the limitation on the amount of legal-tender notes 
which the secretary could retire, the law granted to him al! 
the authority he desired.' 

No law was ever passed by Congress granting so much 
authority to the secretary in the management of the debt and 
currency. His discretion had been enlarged as the national 
expenditures increased and the need of obtaining a larger 
supply became greater. This law bestowed authority in a 
diiferent direction — namely, in the funding of the debt, and in 
contracting the currency. The people were soon to learn how 
the secretary intended to exercise his extraordiuaiy power. 

The converting of the temporary obligations into six-per- 
cent bonds, payable at the pleasure of the government, was 
begun contemporaneously with the contracting of the paper 
circulation. Near the close of 1867 he could report that since 
the 1st of September, 1865, the temporaiy loans, the certifi- 
cates of indebtedness, and the five-per-cent notes had been 
paid, with the excej)tion of small amounts that had not been 
presented, the compound-interest notes had been reduced from 
$217,024,160 to $71,875,040, the 7.3 notes from $830,000,000 
'Act, April 12, 1866, 39 Cong., fii-st session, chap. 39. 



1867.] PAYMENT AND REFUNDING OF PUBLIC DEBT. 311 

to $337,978,800, and the legal tenders and fractional currency 
from $459,505,311 to $387,8.71,477, while the cash in the treas- 
ury had been increased from $88,218,055 to $133,998,398, and 
the funded debt had also increased $686,584,800. Thus nearly 
$1 ,300,000,000 of temporary obligations had been paid or funded 
without disturbance to the ordinary business of the country. 

The policy of converting these temporary loans did not find 
favor in all quarters. If the secretary could truthfully say, 
near the close of 1867, that "the result upon the whole had 
been satisfactory " to himself, and, as he believed, " to a large 
majority of the people," it was not to all. Senator Sherman 
afterward declared in the Senate, that when the war ended 
"the amount of gold-bearing bonds did not much exceed 
$1,000,000, and all the rest of our indebtedness was in cur- 
rency securities ; but by this mistaken action the latter were 
converted into six-per-cent five-twenty bonds, pnd the period 
of payment was postponed eight years by allowing their con- 
version at the end of three years." ' Whatever opinion might 
have been entertained about our finances in 1865, "there can 
be no doubt that on the 12th of April, 1866 [when the above 
mentioned law was passed], it was not wise or politic to fund 
the debt into a six-per-cent bond." ^ Nevertheless, this policy 
was pursued of paying or funding the temporary debt until 
it disappeared. 

'Speeches, p. 247. 

' Ibid., p. 248. " The effect of this legislation," he added, " was at once to 
sever the bond from the note. All forms of indebtedness except the notes 
were allowed to be funded into bonds. This at once checked the apprecia- 
tion of the notes. Gold had greatly lowered in price, till, in April, 1866, 
when this Act was passed, it was only worth twenty-five and one-half per 
cent premium ; but from the passage of this Act it immediately rose, and in 
July averaged fifty per cent." 



312 FINANCIAL HISTORY OF THE UNITED STATES. [1867. 

The criticisms relating to the execution of this feature of 
his policy were slight compared with his management of the 
gold received for duties. In March, 1864, Congress author- 
ized the secretary to anticipate the payment of the interest on 
the public debt for a period not exceeding a year, and to dis- 
pose of any gold in the treasury not necessary for the jiayment 
of interest on the public debt. When the bill was discussed 
strong opposition appeared. It was seen clearly, even then, 
that to accumulate gold in the treasury, beyond the real wants 
of the government, was to deplete the market and enhance the 
price. Again, many who were willing that the surplus should 
be sold objected strenuously to clothing the secretary with the 
power to sell it at private sale. On the one Land, it was 
believed that if he had this power he could more effectually 
til wart the design of the gold speculators, while they, natur- 
ally enough, were unwilling he should have it, because he 
could thus control to some degree their movements. Others 
were opposed for different reasons to the granting of such 
power.^ The law had no immediate effect on the price of 
gold. 

The policy of Mr. McCulloch was to keep a large gold 
reserve. He maintained that confidence in securities at home 
and abroad was strengthened by constant evidence of the 
ability of the government without depending on purchases in 
the market to pay the interest on the public debt, and a 
steadiness to trade by preventing violent fluctuations in the 
convertible value of the currency, which were more than an 
ample compensation to the country for any loss of interest that 
might be sustained. If the gold in the treasury were down 

1 18 Bank. Mag., pp. 761, 841. Ex. Doc, No. 134, 39 Cong., first session. 
House Keport, No. 14, 39 Cong., second session. 



1867.] PAYMENT AND EEFUNDING OP PUBLIC DEBT. 313 

to what was absolutely needed for the paymeDt of the interest 
on the public debt, not only would the public credit be in 
danger, but the currency; and, consequently, the entire business 
of the country would be constantly subject to the dangerous 
power of speculative combinations. 

Such a disposal of the gold was called by those opposed to 
the secretary's policy " secret sales." They were made T\-hen 
the secretary thought that prices were satisfactory and when 
currency was needed. Though made in the open market, 
buyers M'ere not advised when and to ^vhat amount sales 
would be made. The same method was observed in selling 
bonds. If specie payments had been in operation, and the 
debt of the government had been funded, there would have 
been but little need for the secretary to consider with much 
care the condition of the stock and money market. But so 
long as specie payments were suspended, and a vast amount 
of public indebtedness was held in the form of temporary 
obligations, the secretary could not disregard the conditions 
of these markets. " If bonds had to be sold to provide 
the means for paying the debt that were payable in lawful 
money, it was a matter of great importance to the treasury 
that the price of the bonds should not be depressed by artificial 
processes. If the seven -thirty notes were to be converted into 
five-twenty bonds, it was equally important that they should 
sustain such relations to each other in regard to prices that 
conversions would be effected. If bonds were at a discount, 
the notes would be presented for payment in legal tenders, 
and these could only be obtained by further issue, or the sale 
of some kind of securities. Until the temporary obligations 
were funded, therefore, the state of the money and stock market 
was a matter of deep solicitude to the secretary. If he 



314 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

had been indifferent to it in his own judgment, or failed care- 
fully to study the influences that controlled it, and had hesi- 
tated to exercise the power with which Congress had clothed 
him for successfully funding the temporary debt by conver- 
sions or sales, he would have been false to his trust." That, 
on _ the whole, he did exercise this great power wisely, is the 
general judgment of those who watched his conduct most 
closely, and who were the most competent to pronounce an 
intelligent 02:)inion. 

By the time the last of the temporary obligations^ had been 
funded, in 1868, §271,496,018 of the public debt had been 
paid. This was an enormous and gratifying reduction. Two 
problems now remained — to continue to pay the debt, and to 
refund at lo'wcr rates whenever the opportunity arose. 

A sinking-fund law had been enacted in February, 1862,^ 
but the expenditures during the war so greatly exceeded the 
revenue of the government that no surplus existed for such 
application. The law provided that one per cent of the entire 
debt should be purchased within each fiscal year and set apart 
as a sinking fund, and that the interest on this fund should 
be applied in like manner to the purchase or payment of the 
debt. As the bonds purchased for the sinking fund were 
destroyed by law, Congress provided that an amount equal 
to the interest on the bonds thus destroyed should be applied, 
the same as though they existed. If the law had been enacted 
from the beginning, the amount paid for the fiscal year ending 

^ The amount of six-per-cent bonds or " consuls," as they were called, to 
distinguish them from the bonds issued under the Act of 1865, which were 
issued to discharge the temporary obligations, was, in 1865, ^332,998,950 ; 
1867, $379,618,000 ; 1808, $42,539,350. 

' Ann. Treas. Report, 1876, p. 10. 



1866.1 PAYMENT AND EEFXJNDING OF PUBLIC DEBT. 315 

June 30, 1863, would have been $5,556,269; for 1864, 
$12,184,090 ; and for 1865, $20,233,683. The next year the 
reduction of the debt began, and the sum of $31,196,387 was 
paid. 

From that time onward to the present the debt has been 
reduced, though not regularly, as the sinking-fund law 
required. Some years only small sums have been paid, and 
some years even there has been a slight increase. A larger 
aggregate amount, however, has been paid than was required 
by the sinking fund. AYhat the secretaries of the treasury 
have done — and they could do no more — was to pay into the 
sinking fund the surplus funds of the treasury after discharg- 
ing all other indebteduess. As administered, therefore, it is no 
more effective than a law would have been requiring the 
secretary to use the surplus revenue in ^jayment of the public 
debt. If the law had provided that in the event of an 
insufficient revenue to pay the amount required by the sink- 
ing-fund law and all other laws of the government, the 
secretary should niake a preference of the sinking fund, either 
in part or in whole, to specific appropriations like those for 
rivers and harbors and other improvements which rest on no 
obligation, then the sinking-fund law would have had a 
genuine vitality and effectually extinguished the debt. So 
long as the present construction exists the debt may be paid, 
because public sentiment strongly favors it ; but the way is 
easy to defeat its reduction unless the provisions of the sink- 
ing-fund law are rendered more imperative. 

Debt-paying had not gone very long before the question was 

' Concerning destruction of bonds after redemption, see House Keport, 
No. 23, 40 Cong., second session ; Keport of Joint Select Com., on United- 
States Securities, No. 273, 40 Cong., third session. 



316 FINANCIAL HISTORY OF THE UNITED STATES. [1866. 

raised whether the government was not justified in paying the 
$500,000,000 five-twenty loan of 1863 in legal-tender notes. 
The inquiry excited great interest and some alarm. 

During the debates in Congress on the bills for authorizing 
this loan, very little was said concerning what lenders would 
receive in payment. The bill itself was silent on the subject. 
The chairman of the Committee of Ways and Cleans, when 
trying to show what a desirable investment these bonds would 
be, said, " A dollar in a miser's safe, unproductive, is a sore 
disturbance. In United-States loans, at six per cent, redeem- 
able iu gold in twenty years, the best and most valuable per- 
manent investment that could be desired." And again he 
said, " Widows and orphans are interested, and in tears, lest 
their estates should be badly invested. I pity no one who 
has money invested in United-States bonds, payable in gold in 
twenty years, with interest semi-annually." 

These utterances clearly show how Mr. Stevens supposed 
they would be paid, and, doubtless, all the members thought 
like himself As the government-bonds had always been paid 
in gold, the usage was so well known that a statement in the law 
was not thought necessary.^ In two later Acts, ]\Iarch 3, 1863, 
and March 3, 1864, it was expressly stated that the bonds 
should be paid in coin ; these provisions, though, attracted no 
attention at the time, either in Congress or among the people, 
and were accidental. Under the former of these Acts, nearly 

' This question was raised by S. H. Walley, President of the Eevere 
Bank, Boston, in 1863, to which the assistant secretary replied, "The five- 
twenty sixes, being payable twenty years from date, though redeemable 
after five years, are considered as belonging to tlie permanent loan ; and so 
are also the twenty-year sixes (1881), into whieli the tliree year's seven- 
thirties are convertible. These bonds will, therefore, be paid in gold." — 18 
Bank. Mag., p. 10. 



1867.] PAYMENT AKD REFUNDING OF PUBLIC DEBT. 317 

$300,000,000 of bonds were issued, yet they had no higher 
reputation than other bonds of the same class. Nevertheless, 
that these Acts contained a statement of the thing in which 
the bonds were to be paid, led many to contend that the other 
bonds were to be paid differently. There was nothing in the 
condition of the country when the Acts were passed requiring 
an unusual provision in order that the loans authorized by 
them might be successfully negotiated ; on the contrary, the 
national credit was better then than at periods when other 
loan bills were passed ; nor was this the intention of any 
member of Congress ; nor did any of the officers of the treasury 
department suppose that the bonds authorized were different 
from tiaose issued under other Acts. 

Mr. jMcCulloch was pronounced in his utterances on the 
matter. " What is the United States pledged in regard to the 
public debt ? Is it not that it shall be paid according to the 
understanding between the government and the subscribers to 
its loans at the time the subscriptions were solicited and ob- 
tained? And can there be any question in regard to the 
nature of this understanding ? Was it not that while the 
interest-bearing notes should be converted into bonds or paid 
in lawful money, the bonds should be paid, principal as well 
as interest, in coin ? Did any member of the House or of the 
Senate, prior to 1864, in the exhaustive discussion of these 
bills, ever intimate that the bonds to be issued in accordance 
with their provisions might be paid, when redeemable, in a 
depreciated currency ? Was there a single subscriber to the 
five-twenty bonds or to the 7.3 notes, which by their terms 
were convertible into bonds, who did not believe, and who 
was not given to understand by the agents of the government, 
that both the principal and interest of these bonds were pay- 



318 FINANCIAL HISTORY OP THE UNITED STATES. [1867. 

able in coin? The bonds were negotiated with the definite 
understanding that they were payable in coin." 

When the agents employed by the government to sell- the 
bonds advertised them for sale, they announced that "The 
principal and interest would be payable in coin." They sup- 
posed that before the time arrived for paying them, specie 
payments would be resumed, in which case this question would 
not have arisen. " No one," said the Finance Committee of 
the Senate, who reported ou this subject, " supposed that two 
years after the war was over greenbacks would still be 
depreciated." The secretary of the treasury himself made 
no announcement, but in May, 1864, he wrote to Mr. Hooper, 
a member of Congress, that it had been the constant usage 
of the department to redeem all coupon and registered bonds 
forming part of the funded or permanent debt of the United 
States in coin, and that he had not deviated from this usage 
during his administration. These bonds, therefore, were, by 
the usage of the government, payable in coin. 

INIoreover, all the States had made loans in the same man- 
ner as the government for many years, and their usage had 
been similar to it when paying them. Nevertheless, except 
Massachusetts, they now put a different construction on the 
laws by which they had borrowed. Although their bonds 
had uniformly been paid principal and interest in coin, they 
now held that their faith was kept by paying either principal 
or interest in legal-tender notes, and creditors acquiesced in 
this construction. So corporations and private citizens who 
had contracted debts which by law and custom had been pre- 
viously paid in coin, considered themselves released by pay- 
ment in legal tenders. 

Failing to get a declaration from Congress in favor of pay- 



1869.] PAYMENT AND REFUNDING OF PUBLIC DEBT. 319 

ing these bonds in legal-tender notes, those who were at the 
head of this movement now sought to have the entire debt 
repudiated. This sentiment was strong and outspoken, 
and led Mr. INIcCulloch to say in his annual report for 1866, 
that " he had noticed with deep regret indications of a grow- 
ing sentiment in Congress — notwithstanding the favorable 
exhibit which had been from time to time made of the debt- 
paying power of the country — in favor of the postponement 
of the payment of any part of the principal of the debt, until 
the national resources shall be so increased as to make the 
payment of it more easy." This sentiment spread rapidly 
and damaged the credit of the country, both at home and 
abroad, by exciting apprehensions that the good faith of the 
nation might not be maintained, and prevented the bonds 
from advancing in price, as they would have done after 
the maximum of the debt had been reached. It rendered 
funding at a low rate of interest too unpromising to be under- 
taken. Congress, however, came to the rescue, and in March, 
1869, enacted that " in order to remove any doubt as to the 
purpose of the government to discharge all just obligations 
to the public creditors, and to settle conflicting questions 
and interpretations of the laws, by virtue of which such obli- 
gations have been contracted, it is hereby provided and 
declared, that the faith of the United States is solemnly 
pledged to the payment in coin, or its equivalent, not' bearing 
interest, known as United-States notes, and of all the interest- 
bearing obligations of the United States, except in cases where 
the law authorizing the issue of any such obligation has ex- 
pressly provided that the same may be paid in lawful money, 
or in other currency than gold or silver." ^ 

Act, March 18, 1869, 41 Cong., first session, chap. 1. 



320 FIlsAXCIAL HISTORY OF THE UNITED STATES. [1868. 

Thus the dangerous figure of repudiutiou which had been 
boldly moving before the public for several years received a 
severe blow. Not that it was killed, for such a thing can not 
be killed by legislative enactment. It can eifect something, 
sometimes very much, and in this instance revived the national 
credit, and contributed to the progress of refunding the public 
debt. Creditors were no longer afraid to buy, and from that 
hour the national credit took a strong turn uj)ward. 

The earliest portion of the funded debt matured in May, 

1867. At that time $178,001,008 of the temporary loan, 
c(.'rtificates of indebtedness, and one- and two-year notes were 
due. Tlie total maturing in 1867 was $925,607,891. In 

1868, !ii;60 4,508,341 ; $100,000,000 in 1869 ; $250,382,400 
in the next eleven years ; in 1881, $318,268,430, and $2,538,- 
000 in 1895. 

A funding bill was introduced into the Senate a year pre- 
vious to the maturing of the first loans above mentioned. 
The bill jtrojxiscd to fund the loan in other bonds bearing five- 
per-cent interest and running for ten years. The subject ^vas 
disrnssc'd at considerable length, and then postponed. 

The next year another bill ^vas introduced, providing for a 
domestic loan of five per cent, and a foreign one at a half of 
one 2)er cent lower. It also provided for funding the United- 
States notes, and a sinking fund. This was debated, amended 
aud passed, but vetoed by a pocket veto of President Johnson. 
In 1868, another trial was made, but nothiug was accom- 
plished. Both branches were in antagonism to the Executive, 
and it was quite difficult to advance any important legislation. 

Two years therefijre had passed away since the maturity 
of the first great war loan, yet nothing had been done in the 
way of funding it at a lower rate of interest. Some of the 



1869.J PAYME^'T AXD REFUNDING OF FUBMC DEBT. 321 

public debt had been paid, mainly the temporary obligations 
which had been rapidly maturing. One reason for the slow 
progress was the fell spirit of repudiation then active, and the 
evident desire on the part of too many to escape the honest 
fulfillment of the national obligations. These influences 
retarded funding, while they did not affect particularly the 
actual reduction of the debt. 

When Mr. Boutwell became secretary, in March, 1869, 
?1, 602, 671, 100 of five-twenty bonds either Avere, or soon 
would be, redeemable. Between that time and December 
§75,477,800 were purchased, and it was expected the govern- 
ment would be able to pay §75,000,000 before the close of 
that fiscal year, leaving about $1,450,000,000 to be funded. 

As only §27,000,000 of the balance of the funded debt 
would be due and payable before 1874, Mr. Boutwell recom- 
mended that at least §250,000,000 of the debt " be suffered 
to remain either fir purcha,se or redemption previous to IS 74." 
This left §1,200,000 to be funded. He recommended that a 
loan for this amount be made, divided into three equal portions, 
the first portion to be pa}'able in fifteen years, the second 
twenty, and the third t^\•euty-five years, each portion to be 
absolutely paid five years after the time of payment. The 
essential conditions of the new loan appeared to him to be the 
following : 

1. That the principal and interest should be payable in 
coin. 2. That the bonds known as the five-twenty bonds 
should be received in exchange for the new bonds. 3. That 
the principal be payable in this country, and the interest pay- 
able either in the United States or in Europe, as the sub- 
scribers to the loan might desire. 4. That the rate of interest 

.should not exceed four and a half per cent per annum. 5. That 

21 



322 FINANCIAL HISTORY Or THE UNITED STATES. [1870. 

the subscribers in Europe should receive their interest at 
London, Paris, Berlin, or Frankfort as they might elect. 
6. That the bonds, both principal and interest, should be free 
from all taxes, deductions, or statements, of any sort, unless 
it should be thought wise to subject citizens of the United 
States to such tax upon income from the bonds as was imposed 
by the laws of the United States upon incomes derived from 
other money investments. "In offering the new loan, citizens 
and subjects of other governments should receive the strongest 
assurance that the interest and principal were to be paid in 
coin, accordhig to the terms of the bonds issued, without any 
deductions or abatement whatsoever.'' 

The secretary further recommended that in order to avoid 
the necessity of employing agents for negotiatiug the proposed 
loan, a liberal commission be allowed to subscribers, and that 
tiiose first subscribing be permitted to select the class of bonds 
in which their subscription should be made ; and, farther, that 
the national banks be required to substitute bonds of the new 
loan f(ir those deposited by them to secure their circulation. 

Early the next year a bill " to authorize the refunding and 
consolidation of the national debt, to extend banking facilities, 
and to establish specie payments," was introduced into the 
Senate by Mr. Sumner. After long debate and amendment, 
the bill became a law.' The secretary flas authorized to issue 
$200,000,000 of bonds, payable ten years from date in coin, 
and bearing five per cent semi-annual interest, also payable in 
coin. The next year the amount was increased to $800,000,- 
000, and the interest was made payable quarterly. He was 
also authorized to issue $300,000,000, at four and a half per 
cent semi-annual coin interest, while the principal was pay- 
' Act, July 14, 1870, 41 Cong., second session, chap. 256. 



1870.] PAYJIENT AND REFUNDING OF PUBLIC DEBT. 323 

able in coin fifteen years from date, and $1,000,000,000 of 
bonds bearing four per cent interest, payable thirty years from 
their date of issue, and like the other bonds " in all respects." 
He was authorized to sell any of these bonds at their par 
value in coin, or to exchange them at par for five-twenty 
bonds, and one-half of one per cent of the bonds authorized 
was " appropriated to pay the expense of preparing, issuing, 
advertising, and disposing of the same." 

The law declared, too, that in paying the bonds thus 
authorized the secretary should determine the amount and 
state his intention, beginning " for each successive payment 
with the bonds of each class last dated and numbered ; " 
and the interest on the bonds thus selected was to " cease at 
the expiration of three months from the date of such notice." 

The law further declared that the bonds and interest thereon 
should be " exempt from the payment of all taxes or duties of 
the United States, as well as from taxation in any form by 
and under State, municipal, or local authority." Mr. Bout- 
well well stated the two reasons why the bonds should be 
exempt from State and local taxes. The first reason was, if 
not exempt, the amount of taxes unpaid by the local authorities 
would be added to the interest which the government would 
be required to pay, and thus the nation would be compelled 
to provide for taxes imposed by local authorities. Secondly, 
as the ability to borrow money might, under some circum- 
stances, be essential to the preservation of the government, the 
power should not, in times of peace and prosperity, be qualified 
by any concession to the State of the right to tax the means 
by which the national government is maintained. 

The public securities had been exempt from State or 
municipal taxation, but the exemption had caused much irri- 



324 FINANCIAL, HISTOEY OF THE UNITED STATES. [1870. 

» 

tation. Congress had not by express Act exempted them ; nor 
was any formal action necessary. It was a constitutional ex- 
emption which could not be aiFected or limited by the Act of 
any State or local government. The Supreme Court of the 
United States had repeatedly decided that no State could levy 
on money invested in any public security, or tax or assess it 
on the ground that such a tax was inconsistent with the power 
of Congress to borrow money. Nevertheless, the States had 
tried to tax these securities, and, in New York, the question 
was tried many times. A large amount of capital was in- 
vested in the national banks, and the State did not cease 
trying to reach it. 

Thus it was believed that a vast amount of wealth which 
was withdrawn from the State-taxing power, and was not 
taxed by the national government escaped altogether. Many 
thought this a grave hardship. It was true that the govern- 
. ment by not taxing it procured the use of it at a corres- 
poniliiigly lower rate. But this action concerning it did not 
suffice. Many thought that in some form, safe to the nation, 
it should be subjected to State taxation. Not a few were 
opposed to the national banking law on this ground. Yarious 
expedients had been mentioned. One was to reserve to the 
State the express power to levy taxes on public securities 
held within the State. Such a reservation, it was contended, 
would become a part of the contract and be valid. On the 
other hand, it was objected that the effect of State taxation 
would be that in many of the States where the taxes were 
high no public securities would be held, and especially in the 
large cities. With such a provision, it was contended, no loan 
could be negotiated, except at such rates of interest as would 
add largely to the public burdens. It was also proposed to 



1870.] TAYMENT* AND REFUNDING OF PUBLIC DEBT. 325 

limit the State taxes to one per ceat. This discrimination 
was as faulty as entire exemption, and would add to the publio 
burdens one per cent of the entire loan. 

The Finance Committee of the Senate, in 1867,' recom- 
mended a different plan, which was to serve, in lieu of local 
taxes, namely, a specific rate on the debt thereafter negotiated, 
and to distribute the same among the States by population. 
" The amount thus reserved," said the committee, " will, in 
the aggregate, equal the probable amount that would be col- 
lected by the States from the capital loaned to the government. 
From the nature of public securities being easy of conceal- 
ment, readily transferred or deposited out of the State, it is 
probable that but a small portion would be reached by taxa- 
tion ; while the mode suggested would secure each State a 
fixed sum collected without expense, and without surreufler- 
ing the power of the national government over its loans, or of 
impeding the ready transfer of the public securities." This 
adjustment, they added, «'ould relieve the bond-holders from 
the reproach of enjoying State law and local privileges with- 
out contributing to the public expenses, and would increase 
the demand for public securities, and thus enable the govern- 
ment to sell them at more favorable rates. 

This recommendation, however, was not favorably received.^ 

' Ko. 4, 40 Cong., second session. In January, 1868, a series of excellent 
articles, signed "Adirondack," appeared in the N. Y. Times criticising this 
report. 

^ The fifth section of the bill reported by the committee provided, "That 
the holder of any lawful money of the United States to the amount of one 
hundred dollars, or multiples of one hundred dollars, may convert the same 
into a bond for an equal amount, the notes so received to be held in the 
treasury as a part of the reserve already provided for, and the holder of 
any of the five-twenty bonds, or of the bonds contemplated by this Act, 



326 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

One critic ^ remarked " that the principle of exempting the 
national debt from State taxation had prevailed throughout 
our whole history, and for obvious reasons. Once admit that 
taxes may be collected by the States upon the national debt, 
or that subsidies shall be collected from the people and paid to 
the States, under a shadow of right in these States to tax the 
national debt, and there ^vill be no end to projected national 
debts and projects of wars to create national debts ; the admis- 
sion will grow into a right, and one more element of evil will 
be placed in that Pandora's box whicli political demagogism 
opens and closes at will." 

Congress determined to adhere to its former policy, except 
to render yet clearer, by distinct enactment, that the public 
securities were free from all taxation. 

The war in Europe rendered it impracticable to refund any 
portion of the debt for some time. The paper for the bonds 
was made, and the plat(>s, yet the work of refunding was 
delayed. On the last day of February, 1871, public notice 
was given that on the 6th of March books would be opened in 

may demand their redemption in lawful money of the United States ; and 
tlie treasurer shall redeem the same in lawful money, unless the amount of 
United-States notes then outstanding shall be equal to 5400,000,000." 
Hunt's Merchant's Magazine thus criticised it : "This section is obviously 
adopted to conciliate the inflationists. It would introduce into the currency 
arrangements an element of discord and confusion, whose disturbing influence 
in business would probably recall our worst experience during the war, when 
the heavy disbursements of the government, requiring five times as much 
currency as an equal amount of ordinary commerce, neutralized some of 
the worst evils of the immense issues of paper money, and of the morbid 
feeling during the expansion in 1863 and 1864. Once admit the principle 
of this scheme, and you will not be able to limit the currency to the author- 
ized $400,000,000." Vol. 53, p. 23. 

' James Gallatin, Financial Economy of the United States, p. 16. 



1871.] PAYMENT AXD REFUNDING OF PUBLIC DEBT. 327 

this eouutiy aud ia Europe for a subscription to the national 
loan. All the national banks and a large number of bankers 
in both countries were authorized to receive subscriptions. 
The first preference was given to subscribers to the five-per- 
cent bonds within the original limit of $200,000,000 of five- 
per-cents. On the 1st of August the national banks chiefly 
had subscribed for $65,775,550. In July of that year an 
agreement was made with foreign bankers for the remainder 
of the §200,000,000, subject to the right of the national banks 
to subscribe for $50,000,000 by the 20th of October. IMr. 
Richardson, who afterward became secretary of the treasury, 
was in London, and represented the government in the negoti- 
ations. The contractors had the right until the next April to 
take them by subscribing for $10,000,000 at once, and for 
$5,000,000 monthly during the intervening time. 

How long had foreign bankers been willing to lend to our 
government ? For a brief period. When Mr. Chase was at 
the head of the treasury department, thinking that gold or its 
equivalent must be imported, if possible, to sustain the 
national credit, he sent Robert J. Walker to Europe as a 
financial agent. He published numerous essays in English, 
F^-ench, and German pertaining to the wealth and resources 
of our country, and showing how well the national honor had 
been always kept. These were sent to all European bankers 
through whose advice investments were made. They repre- 
sented the certainty of the punctual payment of the principal 
and interest of the five-twenty six-per-cent loans in gold. 
" Su bitter then was the hostility of Louis Napoleon and the 
late Lord Palmerston to this country, that, whilst the so- 
called Confederate loan had nearly reached, in Europe, par in 
gold, our United-States stocks could find no place on the 



328 FINANCIAL HISTORY OF THE UNITED STATES. [1871. 

London or Paris exchanges, and our cause no hearing in the 
leading press of either city." From Germany, however, came 
a different response. " The great masses of the people took 
several hundred millions of our loan at the same rates as our 
own citizens." ^ When the war ended, English and French 
bankers speedily learned the worth of Southern investments. 
The next time they were solicited to lend to the government, 
they made a favorable answer. 

All the subscriptions, both home and foreign, were to be 
made through the national banks, certificates were to be issued 
therefor Ijy them to the secretary of the treasury, and the 
bonds were to be lodged with the United-States treasurer for 
deposit. 

By the 1st of August the demand for the new bonds had 
nearly ceased. Shortly afterward the treasury department 
announced that national banks making or obtaining subscrip- 
tions payable in coin would be designated as depositories of 
the public monej' on the usual condition of putting bonds in 
the possession of the United-States treasurer to secure such 
deposits, and that, at the beginning of each mouth, notice would 
be given of the redemption of an amount of bonds equal to 
the amount of subscriptions in coin for the preceding month, 
interest to cease in ninety days from the date of such notice. 
Furthermore, the deposits to pay for bonds called were to be 
drawn from the several banks proportionately. The subscrib- 
ers were to receive as a commission, after paying for the cost 
of paper for the bonds, engraving, printing, advertising, 
delivery, and all other expenses, one-half of one per cent on 
the $200,000,000. The commission was inadequate to lead 
the banks to push subscriptions with much energy, but when 
' Letter of R. J. Walker, November 30, 1867. 



1874.] PAYMENT AND EEFUNDING OF PUBLIC DEBT. 329 

the further right was granted of retaining the money sub- 
scribed until the government demanded it in payment of 
bonds called, a period of three months or longer, the gain was 
enough to lead the banks to put forth their energies, and by the 
end of the month all the bonds were taken. This arrange- 
ment was of advantage to all parties. The funding Act pro- 
vided that the money received for the new bonds should be 
used only in paying for those outstanding. It also provided, 
that the bond-holder should have three months' notice of the 
intention of the government to pay. As this could be given 
safely only on subscriptions already secured, even if the 
money were paid into the treasury, there was a loss of in- 
terest for three months. By this arrangement the banlcs 
had the use of the money, while the government lost noth- 
ing. The result was the speedy taking of all the bonds 
offered. The money received from purchasers remained 
with the banks until wanted by the government for re- 
deeming the bonds, when it was returned to the channels of 
circulation. 

This contract for refunding continued until Mr. Bristow 
became secretary of the treasury, in June, 1874/ when he made 
another contract with several prominent banking houses for 
the sale of the five-per-cent bonds. The contracting parties 
were to pay par for them, and accrued interest to the date of 
maturity of each call for bonds, and were to receive a commis- 
sion of one-quarter of one per cent on the amount of the sales, 
from which, however, they were to pay the expense of sending 
the bonds to London, and of transmitting from that place to 
the treasury the called bonds received in payment." 

At the time of making this contract, the five-per-cent 
' June 2. ^ -Ann. Treas. Eeport, 1874, p. 9. 



330 FINANCIAL HISTORY OF THE UNITED STATES. [1875. 

bonds were selling in small quantities in the open market, for 
a price slightly above par in coin, exclusive of the accrued 
interest; and this enhanced value of the bonds, enabled the 
department to obtain somewhat better terms than had been 
previously obtained. On the 29th of January, 1875, the 
contract was renewed, but so modified that the parties were to 
receive one-half of one per cent for selling the bonds and 
defraying all expense connected with the issue, including the 
expense of preparing the bonds.^ After that time the refund- 
ing of the debt went on rapidly. The contracting parties 
subscribed for $12:2,(j88,550, which was the balance of the 
" New Fives," as the loan was called, remaining not 
neg(_)tiated. Secretary Bristow had the pleasure of announc- 
ing that the funding of five hundred millions of six-per-cent 
Ijonds into others bearing five per cent had been accomplished, 
tliereby saving five millions of annual interest. 

During the sixteen months ' preceding his report, $178,- 
548, .'jOO had been refunded, and the secretary of the treasury 
believed that the remainder of the bonds could be refunded 
into four-and-a-half per-cents and fours, as the funding law 
prescribed, within a reasonable time. By this law, however, 
the four-and-a-half per-cents were to be redeemable in fifteen 
years. He thought that the bonds would be more readily 
taken if they were issued as thirty-year bonds. Congress, 
adhering to the policy of authorizii^g bonds running only for 
a short time, declined to amend the law as the secretary had 
recommended. 

On the 24th of August, 1876, ]Mr. Morrill, the successor of 
Mr. Bristow,^ the fourth and last secretary of the treasury during 
the eight years of President Grant's administration, contracted 

1 Ann. Treas. Eeport, 1875. ' Appointed June 21, 1876. 



1877.] PAYJtENT AND REFUNDING OF PUBLIC DEBT. .331 

■with a syndicate of bankers for $40,000,000 of four-and-a-half 
per-ceuts, they having the right to subscribe for the remainder, 
$■260,000,000, before the 30th of the following June, by noti- 
fying the secretary of the treasury, and he, on the other hand, 
having the right to terminate the contract at any time, on ten 
days' notice, after the 4tli of March, 1877. The compensa- 
tion -was the same as under the former contract. The sub- 
scriljers Avere to pay par and accrued interest iu gold 
coin, matured United-States coupons, six-per-cent five-twenty 
bonds, or United-States gold certificates.* During his term 
of office §90,000,000 were sold. 

His successor, Mr. Sherman,^ becoming convinced, in May, 
that he could sell the four-per-cents, gave notice that he w(juld 
Ihnit the four-and-a-half per-cents to $200,000,000. Of this 
amount $15,000,000 were sold and the coin reserved for 
resumption purposes. By this operation a reduction of 
$2,775,000 was made on the interest account. On the 9th of 
June, the secretary made a new agreement for the sale of the 
four-per-cents.' This was to terminate on the 30th of June, 
1878, with the right on the part of the government to termi- 
nate it on ten days' notice after the end of that year. It con- 
tained the further provision that the syndicate should offer to 
the people of the United States, at par, and accrued interest in 
coin, these bonds, registered and unregistered, in denominations 
of fifty and one hundred dollars, for a period of thirty days 
from the public notice of such subscription, and to offer to the 
subscribers the option of paying in installments extending 
through three months. 

■ For full terms of contract, see Specie Kesumption and Kefunding, Ex. 
Doc, No. 9, 46 Cong., second session, pp. 2, 36. 

2 Appointed March 9, 1877. ^ Specie Eesumption, p. 61. 



332 FINANCIAL HISTORY OF THE UNITED STATES. [1877. 

Subscriptions to this loan were opened on the 16th of June, 
and during the next thirty days .$75,496,550 were subscribed. 
Of this amount $75,000,000 were reserved for resumption 
purposes, and the remainder was applied in redeeming six-per- 
cent bonds. As soon as these subscriptions were paid, the 
secretary was about to issue a call for the payment of §10,- 
000,000 of six-per-cent bonds, when action was postponed in 
consequence of the renewed agitation for the repeal of the 
Resumption Act and the remonetization of silver, events which 
led the syndicate to fear that bonds could not be sold. Three 
days after making his contract with them, the secretary wrote 
an official letter, in which he said that, " As the government 
exacted in exchange for these bonds payment at their face in 
such gold coin, and as it was not to be anticipated that any 
future legislation of Congress, or any action of any depart- 
ment of the government, would sanction or tolerate the re- 
demption of the principal of these bonds, or the payment of 
the interest thereon in coin of less value than the coin author- 
ized by law at the time of the issue of the bonds, being the 
coin exacted by the government in exchange for the same." 
This letter immediately revived confidence, and the sales rap- 
idly increased. Nevertheless, the sales would have been much 
greater had not the law required subscriptions to be paid in 
coin, which could not conveniently be obtained by the people 
outside the large cities. Another cause hindering sales at this 
time was the return of enormous quantities of American 
securities from abroad. 

With the return of specie payments at the beginning of 
1879, the gate-way was opened more widely for investors to 
purchase bonds, and they ^^-ere not slow in acting. As the 
bonds were sold others were paid, and as many of them were 



1879.] PAYMENT AND REFUNDING OF PUBLIC DEBT. 333 

held in Europe, it was desirable to sell enough more in Lon- 
don to prevent the shipment of gold from this country to pay 
for those held there which were or should be called. A con- 
tract was made for this purpose, early in the year, for the sale 
of four-per-cents, the government agreeing to deliver them 
free of charge in London, where an agency was to be main- 
tained while the contract was in force. Bonds to the amount 
of $15,000,000 were thus sold. In the same month Congress 
authorized the exchange of four-per-cent bonds for uncalled 
five- twenties; less than a million, however, was exchanged 
imder this law. 

The secretary, in March, gave notice that when the remain- 
ing five-twenties should be covered by subscriptions, the sale 
of four-per-cents for refunding the ten-forty bonds would pro- 
bably be made on less favorable terms to the purchaser. 
0«ing partly to fears that the heavy payments falling due 
the next two months would create a disturbance in the money 
market, the sales slackened in the month of March. On the 
morning of the 4th of April, the amount of outstanding five- 
twenties not covered by subscriptions to the four-per-cents 
was $59,565,700. Before the close of the day, subscriptions 
were received not only for the whole amount, but for $60,919,- 
800 more. Xotwithstanding the magnitude of this operation 
it was soon to be eclipsed. 

The next bonds that were refunded, were called the ten- 
forties, which bore five per cent interest, and were issued 
under the Act of March 3d, 1864. On the 16th of April, 
$150,000,000 of the four-per-cents were offered at a premium 
of one-half of one per cent, the proceeds of which, as far as 
necessary, were to be applied in redeeming the ten-forties, and 
the remainder, $44,556,300, for converting the refunding 



ou4 FINANCIAL HISTORY OP THE UNITED STATES. [187a. 

certificates offered at the same time. The four-per-cents were 
also oifered in exchange for the ten-forties. The next day 
subscriptions amounting to $149,389,650 were received and 
accepted, beside $34,755,000 received and declined, and the 
four-per-cent bonds were then withdrawn.^ One subscription 
for $40,000,000 of the certificates was also received and 
declined ; for the evident purpose of the law authorizing the 
issue of these certificates was, so far as possible, to distribute 
the debt among the people. The bonds exchanged slightly 
exceeded two millions. 

The chief criticism on this operation of the secretary was, 
that he should have oflcred a bond at par, bearing a lower 
rate of interest instead of a four-per-cent bond at a premium. 
This was a revival of the question which confronted Pitt during 
the war with Xapoleon. Should he borrow money at three 
per cent, and receive only sixty per cent of the principal, or 
at five per cent, and receive the whole of the principal? Pitt 
has been sharply criticised for not borrowing more at five per 
cent. The question is not easily answered, for much depends 
on the future worth of money, and the disposition of tiie debt. 
As the government rate in this country has been lessening, 
probably the better policy would have been the offering of a 
bond at less than four per cent. 

In Fcl)ruary^ of that year. Congress had authorized the 
issue of ten-dollar certificates bearing four per cent interest at 
par for lawful money, and the following month authorized 
their conversion into bonds, in sums of fifty dollars or its 
multiples. Immediately on the advance of the price of the 

' For fuller description of this subscription, see N. Y. Times, April 18, 
1879, nnd N. Y. Tribune of the same date. 
'Act, Feb. 26, 1879. 



ISTO.] PAYMENT AXD REFUXDIXG OF PUBLIC DEBT. 335 

bonds to one-half of one per cent above par, the demand for 
these certificates greatly increased. Offers for them at a pre- 
mium corresponding to that on the bonds into which they 
were convertible w-ere declined on the ground of lack of 
authorit}-. To bring them ax ithin the reach of small invest- 
ors their sale -was restricted to independent treasury officers, 
and public officers bonded for that purpose, and to sums not 
exceeding one hundred dollars at one time. Evasions of the 
intent of the law and instructions, however, with the view of 
immediate conversion of the certificates into bonds, soon 
became evident, and, after continuing the farce ten days, tlie 
officers who were selling the certificates were directed to refuse 
them when such evasions were manifest. The entire amount 
was sold as rapidly as the certificates could be prepared, and 
before the close of the fiscal year. Of the $40,012,750 sold, 
837,203,350 were converted into four-per-cent bonds by the 
end of the following October. In about two years, there- 
fore, Mr. Sherman had refunded $845,345,950, with an 
annual saving in interest of $14,290,416. While these 
refunding operations were going on the government was pay- 
ing double interest a portion of the time. It was paying on 
the new bonds, and also on the old ones, for three months 
after calling them, and before payment was made. Mr. 
Sherman recommended that the notice be shortened from three 
months to ten days. Congress would not change the law. 
Payment of double interest therefore was inevitable.' He did, 
however, escape it in part by calling bonds in expectation of 
the necessary funds to pay for them. To obviate any derange- 
ment of the money market from these operations, the money 
for the subscriptions was kept in the public depositories, and 
1 Why Double Interest was Paid, N. Y. Tribune, Dec. 28, 1878. 



336 FINANCIAL HISTORY OF THE UNITED STATES. [1879. 

was, therefore, in constant use. Had it been withdrawn from 
them, and put into the government treasury, serious conse- 
quences could hardly have been avoided from such a depletion 
of the circulating medium. The arrangements for subscrip- 
tions were so perfect, and executed so wisely, that the payments 
to and by the government in these vast transactions were 
effected without disturbing a single business interest.' 

' Some persons became alarmed because the balances held by some sub- 
scribers for the bonds were so heavy, especially the balances held by the 
First National Bank of New York, which had been the largest sub- 
scriber. On the 16th of December, 1878, the secretary of the treasury was 
directed to inform the House on the subject. Four days later, he sent an 
explanation, accompanied with a monthly table of the balances for eleven 
months. The N. Y. Times said ; " It will be noticed from the above state- 
ment, that for the past nine months the average monthly balance on loan 
iiccount charged against national banks acting as public depositories, was 
over $37,000,000, and that of this average the First National Bank of New 
York is charged with a monthly balance of over $26,000,000. . . . 

" There seems to be a great deal of unnecessary alarm among members of 
C(mgress over this matter. In point of fact, the First National Bank never 
liad the amount in coin which is stated in the secretary's schedule. The 
balances charged against this and other -banks consist of credits to the 
treasury department upon the books of the banks. The matter is explained 
by the following narration of the transactions from which these apparent 
balances arise : The First National Bank is the largest operator in the 
refunding bonds, and was the principal American member of the syndicate 
for the sale of four-and-a-half per-cent bonds. That bank's subscriptions 
to the four-per-cent loan amount, on some days, to more tlian §1,000,000. 
Under a circular issued last January by the secretary of the treasury, banks 
subscribing for the loan were not to be called upon to make their subscrip- 
tions good until ninety days from the date of subscription, the government 
not being required to redeem the called bonds until the expiration of that 
period. Now, supposing that the First National Bank subscribed for 
11,000,000 on September 1 ; a certificate of deposit for that amount, drawn 
to the order of tlie United-States, treasurer, is forwarded to "Washington, 



18T9.] PAYMENT AND REFUNDING OF PUBLIC DEBT. 337 

Most of the ante-war obligations, and a large portion of 
the subsequent ones, had now been refunded or paid. In 
1881, the " new fives," issued under the funding Act of 1870, 
would mature. Secretary Sherman recommended, in his 
annual report for 1879, that authority be given to refund 
them into four-per-cents, but nothing was done. The loan of 
February, 1861, amounting to $13^414,000, which matured 
at the close of 1880, was paid with surplus revenue. The 
amount maturing in 1881 was §673,224,800. In view of the 
requirements of the sinking fund, Mr. Sherman, believing that 
this could be fulfilled by using treasury-notes running from 
one to ten years, changed his recommendation of the former 
year. He said that the purchase of bonds not due in- 
volved the payment of a premium, -which could be avoided 
by the issue of such notes. The large accumulation of money 

and §1,000,000 is charged against tlie bank on the treasurer's books. Bonds 
to that amount are forwarded to the assistant treasurer at I^ew York, to be 
delivered to the banli upon the receipt by the assistant treasurer of a like 
amount in coin, or in called bonds. If called bonds cannot be obtained, 
then the bank must deposit other bonds before those subscribed for -will be 
delivered by the assistant treasurer. Thus, the government is fully insured 
against possibility of loss. IS'inety da}-s after the date of subscription the 
treasurer draws for the amount subscribed, and the transaction is closed, in 
most instances, without a dollar of coin being moved, because the bank 
gathers up the called bonds, and turns thera over in payment or exchange 
for the new bonds. This transaction is repeated daily, and it thus happens 
that at the end of the month a large balance has accumulated, tlie amount 
varying according to the sale and exchange of bonds. The entire business 
is confined to the exchange of four or six-percent bonds, and, in fact, no 
coin is needed, and very little is used. The bonds issued are, of course, 
charged as having been sold for coin, and in the final settlement, the six- 
per-cent bonds redeemed by exchange are charged as having been purchased 
with coin. On the books of the department the transaction appears on a < oin 
basis, because the accounts could ke kept in no other way." — Dec. 21, 1878. 

22 



338 FINANCIAL, HISTORY OF THE UNITED STATES. [1881. 

seeking investments afforded a favorable opportunity for sell- 
ing them at a low rate of interest. Congress spent much time 
over a bill for retiring the bonds, and issuing new ones bear- 
ing three-and-a-half per cent interest, and running for forty 
years before the government had the option of payment.' 
The bill, however, was vetoed, and Congress adjourned with- 
out further action. 

Mr. "Windom/ who succeeded Mr. Sherman as secretary of 
the treasury, conceived the plan of continuing the bonds at 
the pleasure of the government, though bearing the lower rate 
of three and a half per cent interest. Those who desired to 
do this sent their bonds to Washington, and new ones were 
issued therefor, with the fact of their continuance stamped 
across their face. This plan was highly successful, the bonds 
were promptly sent and exchanged, while the foreign holders 
who preferred payment were paid, for which ample resources , 
existed in the treasury.^ 

Afterward, when the national banking associations were 
re-chartered, they were granted the privilege of exchanging 
the " Windoms" or three-and-a-half per-cents for other bonds 
bearing three- per cent interest, to which was given the ad- 
vantage that they should not be called until all the three-and- 
a-half per-cents were paid. The amount exchanged was so 
great, as Avell as the surplus that could be devoted to paying the 

1 For the bill, see 10 Cong. Kecord, p. 989. 

^Mr. Windom, who was appointed March 5, ISSl, retired Nov. 13, 1881, 
and was succeeded by Mr. Folger the next day. On the 4th of September, 
1884, jMr, Gresham was appointed, and held the oflBce until the 27th of 
October following. On the 28th of the same month, Mr, McCulloch returned 
and served during the remainder of President Arthur's administration. 

' See Mr. Windom's letter to Am. Bankers Association, giving an account 
of his refunding of the bonds. Proceedings, 1881, p. 26. 



1884.] PAYMENT AND REFUNDING OF PUBLIC DEBT. 339 

three-and-a-half per-cents, that in a short time only the threes 
remained \vithin the pleasure of the government to discharge. 
It happened that at the time fixed for concluding the his- 
tory of our finances, INIr. McCulloch, who was at the head of 
the treasury department at the close of the war, and when the 
.debt reached its greatest height, was also secretary of the 
treasury. He remarked that it was in the highest degree 
gratifying to him to notice the great reduction that had been 
made in the interval. On August 31, 1865, the indebtedness 
less cash in the treasury was $2,756,431,571, the annual 
interest charge, .§150,977,697.87, and the average rate paid 
was 6.34 per cent. On November 1, 1868, near the close of 
his first term of service as secretary, the debt less cash in the 
treasury was §2,484,935,552.82, the annual interest charge 
had been reduced to $126,408,343, and the average rate paid 
was 5.8 per cent. Sixteen years later, on November 1, 1884, 
the net debt was $1,408,482,948.69, the interest charge was 
only .§47,323,831.70, and the average rate paid was 3.92 per 
cent. The four following lines are unparalleled in the history 
of financial prose. 

Reduction of debt in sixteen years .... §1,076,452,604.13 

Eeduction of annual interest charge .... 79,084,511.50 

Reduction of debt in nineteen years .... l,347,94s,622.74 

Reduction of annual interest charge .... 103,653,866,37 

"In the management of its debt" said Mr. McCulloch,^ 
" the United States has been an example to the world. Noth- 
ino- has so much surprised European statesmen as the fact that 
immediately after the termination of one of the most expensive 
and, in some respects, exhaustive wars that has c\-cr been 
carried on, the United States should have commenced the 
' Ann. Treas. Report, 1884. 



340 FINANCIAL HISTORY OF THE UNITED STATES. [1885. 

payment of its debt and continued its reduction through all 
reverses until nearly one-half of it has been paid ; that reduc- 
tion in the rate of interest has kept pace with the reduction 
of the principal ; that within a period of nineteen years tlie 
debt, which it was feared would be a heavy and never-ending 
burden upon the people, has been so managed as to be no 
longer burdensome. It is true that all this has been eifected 
by heavy taxes, but it is also true that these taxes have neither 
checked enterprise nor retarded growth." 

And now for the climax of this wonderful story of national 
debt-paying. A large surplus was in the treasury at the time 
of Mr. McCulloch's retirement, which has been steadily grow- 
ing ; }et neither he dared, nor has his successor, to use a 
dollar to reduce the debt lest the standard of payment should 
be changed from gold to silver. That a nation so opulent, 
and with such high rational expectations, so facile in borrow- 
ing and so joyously prompt in paying, should adopt a policy 
for debasing its standard of value and continue it in the clear 
knowledge of accomplishing this result, is one of those sense- 
less paradoxes which too often have given the otherwise bril- 
liant coloring of our financial history a darker hue. 



1865.] THE NATIONAL BANKING SYSTEM. 341 



CHAPTEE IV. 

THE NATIONAL BANKING SYSTEM. 

Aftee Congress gave a preference in the spring of 1865 to 
the State banks which should apply before the 1st of July 
following for conversion into national banking associations, 
" nearly all of the State banks voluntarily changed." This is 
the language of the comptroller in his annual report for that 
year. He was correct ; but when we consider the induce- 
ments offered to them to change, and the heavy burdens they 
would have borne if they had not, the language is strained. 
Clearly seeing their disadvantage in the future race for busi- 
ness if they remained State institutions, they changed so 
rapidly that on the 1st of November nine hundred and twenty- 
two of the one thousand six hundred national banks were con- 
verted ones. Thus in two years and a half from the time of 
organizing the first national bank, the national system became 
firmly established. Born in national agony, and always en- 
compassed with enemies, the system has proved its superiority 
to every other tried in our country, and, like a good man, has 
won more and more popularity " with the process of the 
suns." 

The first effect of converting the State banks was to dimin- 
ish the aggregate bank circulation, for the reason that no 
national currency was delivered to a converted bank until its 
former circulation was reduced below the amount prescribed 



342 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

by the national law. As several of the States ■which author- 
ized the conversion of their banks gave them authority to con- 
tinue the issue of their State circulation for a limited period 
after effecting the change, the action of the comptroller caused 
much complaint. Yet he was unquestionably right ; they 
were bound to discharge all their former obligations, including 
the redemption of their circulation, and State enactments 
granting privileges or imposing restrictions contrary to the 
natioual banking law were void. 

On the 1st of October, 1865, the amount of national bank- 
notes in circulation was |171,32],903, beside $19,525,152 in 
their possession and not issued. The outstanding State bank- 
notes at that date were $78,867,575, and the legal tender and 
fractional currency amounted to $704,584,658. 

As we have seen, when Congress first discussed the bill for 
establishing the system, one of the strongest objections was 
the imperfect method for redeeming the circulation. This 
imperfection ^vas acknowledged by the comptroller, the head 
of the treasury, and other persons who were engaged in ad- 
ministering the law. When it was revised the next year a 
step in advance was taken. Mr. Clarke, who succeeded Mr. 
McCuUoch as comptroller, recommended that the banks be 
required to redeem their notes in "the great financial and 
commercial centres of the country. New York, Boston, and 
Philadelphia." This recommendation was heartily indorsed 
by the secretary. There were very few banks outside New 
York, Boston, and Philadelphia, which did not keep their 
chief balances in one of them, as a regular demand existed at 
that time for exchange on those cities. It was contended that 
where the current of trade required the banks to keep accounts 
for their own accommodation and that of their customers and 



1866.] THE NATIONAL BAXKIXG SYSTEM. 343 

the public, there should redemptions be made. A bill was 
iutroduccd embodying the comptroller's recommendation, but 
the banks were opposed to it and prevented its passage. 

The next year the comptroller renewed his recommendation. 
He declared that wlien the notes became redeemable at a 
common centre, A^hich should be the centre of trade, their 
amount would be " regulated strictly by the demand." When 
the volume was greater than needful to do the business of the 
country, the banks would be required to redeem the surplus 
and it would be retired. When trade was active and more 
currency was needed, the banks would expand their issues, and 
redemptions would not be demanded until the season of 
activity was over. If all the banks were required to conform 
to a uniform standard of responsibility, the burden, equally 
divided among all in proportion to their circulation, would be 
light, because the aggregate redemption at any time would not 
exceed the surplus of notes in circulation ; if such a rule were 
not established, the burden would be unequally borne, and 
would fall most heavily on those banks which conformed to 
the highest standard, compelling them, by the frequent return 
of their notes, to contract their issues, while the remote banks 
would be tempted to undue expansion by the difficulty and 
expense of returning their notes for redemption. One effect, 
therefore, would be an overflow of the inferior currency. 

The strongest objection raised at this time to a central 
redeeming agency was the rendering of the country banks 
tributary to those of New York. This objection, by many, was 
regarded groundless, but the danger could have been entirely 
averted by organizing a national bank in New- York City, hav- 
ing no circulation, and acting as the redeeming agency of the 
country, and the clearing-house of all the national bank-notes 



344 FINANCIAL HISTORY OF THE UNITED STATES. tl866. 

in circulation. Tliis plan was recommended by Comptroller 
Hulburd. The national banks should own the stock and 
manage it for their own interests. One department, he said, 
should be devoted exclusively to redemptions and exchanges 
of currency, another to a general banking business. " Such 
an institution would prove of incalculable beneiit to the bank- 
ing, commercial, and industrial interests of the country. It 
would place the bank circulation of the country at once upon 
the soundest footing, and demonstrate practically the fact that 
the banks stand ready to make their issues not only redeem- 
able, but actually convertible at all times in the great markets 
of the Union." 

These recommendations, like those previously made, did not 
fructify. One reason, beside those mentioned, was, the legal- 
tender notes in which bank-notes were redeemable, possessed 
no higher value than the other kind. There was, therefore, 
not that deep interest in the matter that would have existed 
had the redemption been in gold or silver. At that time it 
was simply the substitution of one kind of notes for another. 
Moreover, the amount of bank-notes that could be issued was 
circumscribed, so there was no danger of unauthorized infla- 
tion. The arguments for a central redemption were applica- 
ble to a bank currency system very different from the one 
existing. 

The former systems contained no restriction on the amount 
that could be issued, and therefore prompt and easy redemp- 
tion was necessary to guard against an over-issue. The 
amount of currency under those systems was regulated in 
theory by the requirements of business, while the national 
system was introduced with a fixed maximum limit. By the 
State systems, the noti.-s of banks located outside New England 



1874.] THE NATIONAL, BANKING SYSTEM. 345 

and New York were redeemable only at the counters of the 
issuing banks. The notes of such banks in ordinary times 
came back slowly ; in truth, it may be said that nearly two- 
thirds of the banks of the country did not redeem their notes. 
The New England banks, though, had a different system of 
redemption, redeeming not only over their counters, but also 
at the Suffolk Bank, in Boston, which received as a compensa- 
tion, the profits on the money sent for redeeming bank circula- 
tion. By the New-York system, notes were redeemed at par 
at their place of issue, and at one-quarter of one per cent dis- 
count in New- York City, Troy, and Albany. Both of these 
systems were quite satisfactory, but ^^'ould have been less 
effective had they embraced all the banks of the country. 
The Suffolk system was limited to five hundred banks in six 
States, having an aggregate circulation of $500,000,000 ; the 
New- York system was limited to the banks of a single State. 
Some reasons did truly exist for perfecting the mode of 
redeeming national bank-notes. One reason was that persons 
desired occasionally to exchange them for legal-tender notes to 
pay debts when the other kind would not suffice. Another 
reason was that banks occasionally wished to exchange bank- 
notes for legal-tender notes in order to replenish their reserve. 
A much more potent reason for providing an effective mode 
of redemption was to exchange soiled and mutilated notes for 
fresh ones. The mode of redemption first devised, even with 
the improvement of the following year, was not sufficiently 
active to drive the notes into the places designated for redemp- 
tion. The entire stream of circulation became polluted, and 
the need of purifying it after a short time was manifest. Not 
until 1874^ did Congress enact that the bank circulation 
' Act, June 20, 43 Cong., first session, chap. 343. 



346 FINANCIAL HISTORY OF THE UNITED STATES. [1876. 

should be redeemed by the United-States treasurer at Wash- 
ington. To accomplish this end the banks were required to 
deposit with him five per cent of their circulation in lawful 
money, which was counted as a part of their lawful reserve. 
What the law did to purify the polluted stream of circulation 
may be seen from the following table. The amount of muti- 
lated notes returned to the comptroller's office for destruction 
for the years ending October 31, was : 

1869 18,603,729 

1870 14,305,689 

1871 24,344,047 

1872 30,211,720 

1873 ........ 36,433,171 

1874 49,939,741 

1875 137,697,696 

1876 98,672,716 

The annual quantity since returned has been much less 
than for any year above mentioned. The banks have paid 
the expense of redemption, and the mode has proved simple 
and effective. A reserve fund of money must be kept some- 
where, and this can be done as safely by the government and 
at Washington, as by the banks and in New York. It is gener- 
ally admitted that the mode of redemption thus established after 
ten years of thought bestowed on the matter is the best prac- 
ticable, and is not likely to be soon changed. 

Although the banks were relieved from keeping in their 
vaults a reserve to redeem their circulation, they were required 
to keep the same reserve as before for the payment of de- 
posits. As the agencies for redeeming the circulation were 
abolished, it was the clear design of the law that the countiy 
banks thereafter should themselves keep that portion of their 
reserve which previously had been kept with their redemption 



1876.] THE NATIONAL BANKING SYSTEM. 347 

agencies. In other words, as the government had become the 
sole redeeming agent with which all banks kept a redemption 
fund to the amount of five per cent of their circulation, it was 
not necessary for any bank to keep a fund elsewhere for that 
purpose. But the law was not changed which permitted the 
banks in the redemption cities " to keep one-half their lawful- 
money reserve in cash deposits 'in the city of New York." 
The operation of the law, therefore, was, that tlie country 
banks were required to keep a fund equal to five per cent of 
their circulation at Washington, and another fund of ten per 
cent of their circulation and deposits at home. The banks 
in the redemption cities must keep a similar reserve fund at 
Washington, and another of ten per cent iu their own vaults. 

The keeping of a large portion of the reserves of the banks 
outside New- York City with the banks located there continued. 
This reserve feature of the system excited much bank opposi- 
tion for a long period. The requirements of many of the 
States had been very vague and loose. There were indeed 
some exceptions. The States of Massachusetts and Louisiana 
particularly required the keeping of an ample reserve. New 
York did not have such a requirement. The country banks of 
that State, however, were required to redeem their notes in the 
city of New York in specie, and an examination of tlieir returns 
showed that while they usually kept only about two and a half 
per cent of circulation and deposits in their vaults, they did 
keep on deposit with their city correspondents nearly as large 
portion of reserve as they do now under the national system. 

Those who at an early date advocated a free banking law 
and the expansion of the currency general, also favored quite 
generally the repeal of all reserve regulations. In truth, they 
favored the freest kind of banking. They did not believe in 



348 FINANCIAL HISTOEY OF THE UNITED STATES. [1873. 

creating reservoirs for dry times, but in letting the stream of 
circulation run ^vithout hindrance, and if that were not enough, 
to open the government windows and deluge the land with 
more. In short, they contended that whatever might be 
lacking, there ought not to be a lack of notes so long as a 
government, paper, printing presses and labor existed. 

Nor was this position confined solely to those who wanted 
cheap money because they had debts to pay, or stocks to sell, 
or who believed that it was a sure remedy for the hard times. 
Some banks entertained the doctrine. They claimed that the 
directors and managers of the banks, and not Congress, were 
the best judges of the amount of money that should be loaned, 
or of the amount that should be hold on hand for the protec- 
tion of their creditors ; that the duty of the government was 
performed when it protected the billholder from loss, and that 
the depositor or other creditor should protect himself. They 
also claimed that sucli laws prevented the banks from extend- 
ing accommodations to legitimate business interests, and conse- 
quently they suifered. Such banks, therefore, were desirous of 
having the restriction surrounding the reserve removed. 

On the other hand, a much larger number heartily approijfed 
this feature of the systeiii. The forrper class of banks, in 
truth, were opposed because they wished to loan all their 
money, while the latter class, which included the conservative 
banks, supported the existing policy. Even if no law had 
existed on the subject, they would have maintained such a 
reserve, for under the State systems, ^\hen no such provision 
existed, they did so. For them, indeed, such a law was not 
necd(;(l ; it was, though, for the banks that did not like it. 
They wished to loan all they could, and too much, and the 
law stood in their wav. 



1873.] THE NATIONAL BANKING SYSTEM. 349 

The reserves which the banks outside New- York City were 
required to keep were sent in large amounts, though irregu- 
larly, to New York. When business was dull and outside 
banks could not employ their funds profitably, they were sent 
to New York to await the revival of business. The banks in 
New York having no legitimate way for employing the 
money at such times, and threatened with the loss of interest 
which they had promised to pay thereon, loaned it to stock 
brokers. Thus the banks tempted the brokers to buy stocks 
by offering them money at low rates. On the other hand, as 
these loans were made on very short time, the lending banks 
could always obtain funds if they were wanted to supply the 
demand of the country banks. If this way had not been open 
to the New- York banks for employing their deposits they 
could not have afforded to pay interest on them, and they 
would have been less profitable ; on the other hand, this prac- 
tice stimulated speculation and enhanced the danger of 
monetary panics. A bank would not have paid interest on 
" country balances," as they were called, if they could not be 
used, and the banks would not have dared loan a considerable 
portion of them on time. All loans on call were to specu- 
lators. Xo other persons had such a use for money. No 
merchant or manufacturer would borrow in that way. This 
striking fact, therefore, appears — while the banking law wisely 
provided for the maintenance of an adequate reserve, a very 
large portion of it was actually used by New- York specula- 
tors. Though this fact was well known, and caused much 
comment, no legislation was attempted. In 1873, when a 
panic broke out in that city, caused by a sudden demand of 
the country banks for their reserves, the New- York banks 
found great difBculty in respondiug. The $60,000,000 of 



360 FINANCIAL III.STOEY OF THE UNITED STATES. [1873. 

call loans on -which they relied for an emergency of this kind 
" were entirely unavailable." The banks held collaterals, it 
is trne, for their loans, but these shrank so rapidly in value 
that the banks could not sell them except at a large sacrifice. 
This is one of the peculiarities of that kind of loan. In good 
times nothing is safer, because the bank daily knows the -worth 
of the collateral, while an ordinary borrower may deceive a 
bank concerning his real condition. In bad times the entire 
list of stocks is apt to shrink, but the credit and ability of 
merchants do not, and so the banks have learned from much 
experience that while both kinds of loans have their advan- 
tages, the ordinary mercantile ones, in the long aggregate, are 
the safest. Xow the banks found themselves in this condition ; 
they could not afford tij sell their collaterals, and so a meeting 
of the clearing-liouse association was held, at which it was 
determined to issue clearing-house certificates, properly secured, 
to the banks that wanted them, and use them as money among 
themselves. The plan had been tried before, and has been 
since ; a new kind of money was extemporized for the occasion, 
which proved effective. 

It was clearly seen how all the mischief had been caused, 
and the remedy was apparent — namely, to stop paying interest 
on deposits.^ Of course, if this had been done, the country 
banks would have kept their deposits at home, and the Xew- 
York banks would not have had the use of them. Two 
parties exist to this question ; it has been discussed numberless 
times, but not settled, and probably never will be. The 

' A committee appointed by the New- York Clearing-liouse Association 
in 1873, recommended " that payment of interest upon deposits, either di- 
rectly or indirectly, be entirely prohibited." A similar report was made in 
1884. See 30 Bank. JIag., p. 86, 



1874.] THE NATIONAL BANKING SYSTEM. 351 

prudeut bankers, who are content with fair profits, condemn 
the practice ; the banks that wish to make the most they can, 
notwithstanding the risks they clearly see must be incurred, 
favor their payment. 

Those who were opposed to legal regulations concerning 
the reserve were likewise opposed to bank examinations. 
The \a.^v, at the outset, required these to be made, and they 
have always been continued. The strong and well-managed 
banks have always favored publicity, the weaker and more 
daring, with some exceptions, have been opposed to it. 
The country was divided into twenty-five districts, and an 
examiner was appointed for each district. Instructions were 
issued to them by the first comptroller of the currency, ]\Ir. 
jNIcCulloch, and ^vitli longer experience greater efficiency has 
been attained in conducting examinations. " This official 
inquiry," said Comptroller Cannon, in the annual report for 
1884, " into the affairs of a national bank, does not end with 
the mere inspection of the cash, bills receivable, books and 
accounts of the association, but the examiners are instructed 
to closely scrutinize the business of the bank, to investigate 
the standing and fitness for their positions of the persons to 
whom the management of the affairs of the association are 
intrusted, and in the manner in which the business is usually 
conducted, whether prudently or otherwise ; to ascertain, as 
far as possible, the character of the loans and discounts of the 
bank, and what losses, if any, have been, or are likely to be, 
sastained." 

On the history of bank examinations we cannot dwell ; if 
some losses have occurred which more efficient examinations 
would have prevented, they have, doubtless, prevented the 
happening of far greater losses. The fact that the strongest 



352 FINANCIAL HISTORY OF THE UNITED STATES. [1876. 

and best-managed banks favor such examinations is proof of 
their need, and that they are a check on operations that other- 
wise would be undertaken. 

Albert Gallatin wrote, in 1831, "Another great guarantee 
against improper management is the obligation to make public 
annual statements of the situation of the banks. The mystery 
with which it was formerly thought necessary to conceal the 
operations of those institutions has been one of the most pro- 
lific causes of erroneous opinions on that subject, and of mis- 
management on their part. . . . Publicity is, in most cases, one 
of tlie best cheeks that can be devised ; it inspires confidence 
and strengthens credit, whilst concealment begets distrust, and 
often engenders unjust suspicions." * The reports and examin- 
ations required by the government have done much to let the 
public iqside the banks, and to show how they are managed. 
The result has been most beneficial. In no country in the 
world has a banking system been so open. Confidence in the 
banks is greater where it is seen that they are true to their char- 
ters of incorporation, and the public will always regard them 
with more favor than if they live in a tomb of concealment. 

The year after perfecting the mode of redeeming the bank 
circulation, the restriction on the amount that could be issued 
was removed." Congress had acted wisely in clarifying the 
circulation before thus enlarging the stream. In the interval 
the original limit of $300,000,000 had been twice increased, 
in order to equalize the bank circulation among the States, the 
reason for which is worth explanation. 

' Considerations on the Currency and Banking System, p. 70. See also 
Comp. Knox's Report, 1881. 

' Act, Jan. 14, 1875, 43 Cong., second session, chap. 15, sec. 3. This was 
the Act which provided for the resumption of specie payments. 



1865.] THE NATIONAL BANKING SYSTEM. 353 

The original Act apportioning one-half of the bank-note 
circulation on the basis of population, and the other half on 
that of banking capital, resources and business, was repealed 
in 1864, and the distribution of the circulation was left 
to the discretion of the comptroller.^ The next year this 
feature of the original law was restored, at the same time the 
internal revenue law provided that all State banks which 
applied before the first of July to become national banking 
associations should have the preference in obtaining a circu- 
lation. The two amendments were not harmonious, and if 
the apportionment liad been made by the original law many 
of the converted State banks could not have obtained as large 
circulation as they could by the revival of the original law. 
But, as it seemed to be the intention and policy of the law 
providing for the conversion of the State banks, so the comp- 
troller thought, to absorb all of them rather than to create 
new banks in addition, the comptroller permitted the conver- 
sion of State banks without limitation. He was wrong,'' and 
the effect of his action ^vas a very unequal distribution of the 
currencv, some of the States receiving far more than their 
sliare by the law of apportionment, and leaving but a very 
limited amount to be awarded to the Southern and to some of 
the Western States. The government having assumed control 
of the currency, it was obviously its duty to provide banking 
facilities to all sections. As the Southern States were in rebel- 
lion v,'lien the national banking system was launched, they 
were too late to employ it in their section of the country. The 
comptroller maintained tliat the deficiency should be supplied, 
first, because it was important to all sections of the country, 
^ Comptroller's Eeport, 1866. 

2 Sherman's Speeches, pp. 214, 216, 222. 
23 



354 FINANCIAL HISTORY OF THE UNITED STATES. [1866. 

particularly to the Northern States, that the South should be 
supplied with all the facilities necessary for the production of 
the great staples of that section, because their shipment abroad 
would reduce the exportation of gold. Secondly, although to 
a limited extent, means were supplied by capitalists from other 
sections for Southern productions, yet the supply was not 
equal to the demand, and foreign capitalists were thus enabled 
to gain entire control over a very large proportion of valuable 
products, thereby gaining large profits, and leaving in the 
country barely the (x)st of production. This state of things 
caused much discontent and dissatisfaction among the pro- 
ducers. The third reason given was, that prosperous industry 
was the most speedy and certain remedy for the existing evils 
in the Southern States. 

Two plans were proposed for supplying the South with 
banking facilities. One plan was to equalize the existing cir- 
culation among the States and Territories, and the other was 
to increase the amount. Two objections were raised to the 
first plan ; the first was the right of Congress to withdraw 
circulation from banks that had issued it ; the second, and 
stronger, was the impracticability of withdrawing a sufficient 
quantity of the bank-notes then in circulation rapidly enough 
to permit the issuing of other notes to banks in the South and 
West in time to furnish the relief desired. This plan, how- 
ever, had the approval of the secretary of the treasury, Mr. 
McCulloch. The comptroller, on the other hand, favored an 
increase, but so adjusted that the amount should not exceed, 
" at any time, or in any month," the amount of legal-tender 
notes withdrawn by the law which at that time authorized 
their contraction. 

The plan adopted was a compromise. The sum of $54,000,- 



1870.] THE XATIOXAL BAXKING SYSTEM. 355 

000 was to be furnished to the banking associations then 
existing, or thereafter organized in " those States and Terri- 
tories having less than their proportion under the apportion- 
ment contemplated by the provisions " of the Act of March 
3, 1865, if the applications were made within a year, other- 
wise the comptroller could issue it to other banking associations 
applying for the same, giving preferences to those having the 
greatest deficiency.' After the whole amount should be dis- 
tributed, .$25,000,000 were to be withdrawn from those banks 
which had an excess, and distributed among other banks in 
States having less than their proportion. 

Such an increase of bank circulation would have enlarged 
the volume of currency if the law had not provided that a 
similar amount of the three-per-cent certificates, issued in 1867 
and 1868, and held mostly by the banks, should be cancelled.^ 
These certificates were payable in lawful money, and were 
authorized for the purpose of redeeming the compound-inter- 
est notes. They largely entered into the reserve of the banks ; 
no effect, therefore, was wrought on the quantity of circula- 
tion ; the three-per-cent certificates, A\-hich were a some^\hat 
dangerous loan, because payment could be demanded at any 
time, were supplanted by national bank circulation. 

The additional circulation was soon issued, and the comp- 
troller made preparations for drawing $25,000,000 from the 
banks having an excess. It would be principally taken from 
the banks in the States of Massachusetts, Ehode Island, and 
Connecticut.' If withdrawn, the circulation of no bank in 
either of those States would have exceeded $300,000. When 
carefully studied, the law was found, like many a previous 

• Act, July 12, 1870, 41 (Jong., second session, chap. 252. 

'^ Ibid., section 2. ' Sen. Mis. Doc, No. 100, 39 Cong., first session. 



S56 FINAlfCIAL HISTORY OF THE UNITED STATES. [1874. 

one, far more difficult to execute than to enact. It was quite 
impossible for the banks to respond if the comptroller should 
make requisition on them, because their notes were scattered 
throughout the country. If they did not comply with such a 
requisition within a year, the comptroller was empowered to 
sell a sufficient amount of bonds belonging to the banks and 
held by the government, and redeem their notes as they came 
into the treasury, until the whole amount required was ob- 
tained. But the notes, as the comptroller remarked, would 
not come to the treasury for redemption unless first assorted 
by the brokers, and resold by them to new national banks 
about to be organized. This would encourage the objection- 
able practice of authorizing new national banks with circula- 
tion, on the condition that currency should be purchased of 
the brokers in the market at a premium. The comptroller 
recommended a repeal of the law, and the issue of $5,000,000 
of additional circulation annually, for five years. 

The majority in Congress were eager to increase the bank- 
note circulation, but President Grant was not, for he vetoed 
a bill which increased the amount $46,000,000. Congress 
then enacted that $55,000,000 should be withdrawn from the 
banks having more than their proportion, and be redistributed 
to tliose which had received less than theirs. That law 
also gave the banks authority to withdraw their circulating 
notes in whole or in part, by depositing them with the United- 
States treasurer in sums of not less than $9000, and of with- 
drawing the bonds deposited to secure them.' No authority 
had been previously granted to the banks for withdrawing 
their circulation. Some of them withdrew their circulation, 
while new banks deposited bonds and received the circulation 
> Act, June 20, 1874. 



1874.] THE NATIONAL BANKING SYSTEM. 357 

to which they were entitled. The retiring of the circulation, 
however, went on more rapidly than tlie issuing of additional, 
so that, in truth, it was not necessary to make requisition on 
the Eastern banks to surrender a dollar. The circulation was 
largest on December 1, 1874, amounting to |352,394,346. 
After enacting the law of June, 1874, the circulation decreased 
$30,869,655 before the end of 1877.^ After that period it 
began to increase, though never ascended the figures just stated. 
In 1881 there was a notable decrease, occasioned by the action 
of Congress. An Act was passed authorizing the issue of a 
three-per-cent bond for refunding purposes, and requiring the 
banks to deposit it as security for their circulating notes, and 
repealing the law of June, 1874, authorizing the banks to 
deposit lawful money and withdraw their bonds. The Act ^vas 
vetoed, but one hundred and forty-one banks not knowing 
what would be its fate, and preferring to get their bonds 
to depositing others bearing three per cent interest, promptly 
deposited $18,764,434 of legal-tender notes. They were 
located in twenty-four States. About one-third of the bonds 
was re-deposited, and for several months the total circulation 
of these banks was less than $7,000,000. They were charged 
with depositing legal-tender notes, and withdrawing their 
bonds in order to derange the money market, though there 
was no proof to sustain it. The sole reason was to get pos- 
session of their bonds. 

1 Comptroller Knox said, in his Eeport for 1878, " Since the passage of 
the Act of June 20, 1874, the national banks, so far from considering the 
privilege of issuing circulation a profitable monopoly, have voluntarily 
surrendered $66,237,323 of their notes, which is $29,463,467 more than has 
been issued to all of the banks organized since that date, while one hundred 
and forty-four banks, with capital stock amounting to $15,517,000, and a 
circulation of $9,190,718, have gone into voluntary liquidation."— p. 145. 



358 FINANCIAL HISTORY OF THE UNITED STATES. [ISTS. 

lu 1875, the year after authorizing an increase of $55,000,- 
000 of bank-notes, the restriction on their issue was removed, 
and the secretary of the treasury was required to retire legal- 
tender notes to the amount of eighty per cent of the national 
bank-notes thereafter issued, until the amount was reduced to 
$300,000,000. ^yhen they had taken out $44,148,730 of 
sucli additional circulation, and legal-tender notes to the 
amount of eighty per cent, or $35,318,984, had been retired, 
Congress declared that it should not " be lawful for the 
secretary of the treasury, or other officer under him, to cancel 
or retire any more of the United States legal-tender notes," 
and when redeemed or received into the treasury under any 
law, from any source whatever, they should " belong to the 
United States," aud should " not be retired, cancelled, or 
destroyed," but " re-issued, and paid out again and kept in 
circulation."' When enacted, $346,681,016 of legal-tender 
notes were outstanding, nor has the law since been changed. 

As the government-bonds appreciated in value, the interest 
of the banks to buy or to retain them as a basis for issuing 
circulating notes constantly declined. With each advance in 
the premium, the inducement was stronger to sell their bonds 
and make sure of their profit. Moreover, the operations of 
the government in paying its bonds rapidly had the same 
effect. There was not much certainty concerning the premium 
on short-time bonds. The probability was that the govern- 
ment would call them as soon as they were due, and this 
affected their premium. Hence the desire of the banks 
to make all they could by selling their bonds. The ques- 
tion of retaining them and continuing their circulation, or of 
selling them and of getting their profits, Avas discussed among 
' 'Res., May 31, 1878, 45 Cong., second session, No. 65. 



1875.J THE NATIONAL BANKING SYSTEM. 359 

the banks constantly. The high premium on these bonds 
also had the effect of checking: the amount of circulation. 

The fact that. the circulation has been declining ever since 
1875, ^yith an occasional short turn, is proof conclusive that, 
ho^vever large may have been the profits of national bank- 
ing, their notes for a considerable period have not yielded 
them much profit. For ten years no restriction on circula- 
tion has existed, and yet the amount has declined in the face 
of a rapidly increasing population and augmenting business. 
What might have been the increase had not the national 
securities commanded so high a premium, or had their duration 
been more permanent, cannot be foretold. It is certain that 
both causes have been Jjarriers against an increase of the 
bank circulation. 

Although the proof has thus clearly existed that bank 
circulation was not very profitable, a ceaseless war has been 
waa;ed ag-ainst them from the time of their organization, 
because they were permitted to issue notes without paying for 
the privilege. Yet the government did not grant a privilege 
not enjoyed by banks as State institutions. The people, how- 
ever, knew much less about their sources of profits when 
they were under State laws. Of course, the people knew 
something about the banks, particularly that they did not 
alwaj'S redeem their notes, and charged high rates of interest 
for money whenever they could. These facts were well 
known. One of the first things discovered by the people, 
after the creation of national banks, was, that they gained 
three profits, one profit on their bonds deposited as the basis 
for their circulation, another on their circulation, and a 
third on their deposits. Although this had always been 
the case, the people had not learned the fact. Not much 



360 FllS-ANCIAL HISTORY OF THE UNITED STATES. [1875. 

was said concerning the latter source of profit, but the 
double profit on bonds and circulation caused endless agita- 
tion. It led many to make war on the banks in ne^vspapers, 
speeches, and pamphlets. At times the agitation was very 
fierce; at others, it quite died away. The principal conten- 
tion was to compel the banks to relinquish their circulation. 
In Congress and elsewhere, this cry was constantly heard. 
Some baulcs were so moved that they did withdraw their 
circulation on this account. As we have already seen, after 
the law of June, 1874, the bauks began to retire their circu- 
lation, but not solely because the circulation was unprofitable. 
Many reasons combined. , One reason was because there was 
more profit in selling the bonds i^t the premium they com- 
manded than in keeping them. With the resumption of 
specie payments the diiference between gold and paper would 
disappear, and this would be a gain to the bank selling them. 
Iq mauy cases, deposits grew rapidly, and banks preferred to 
make their profits on these. Many banks never took out 
any circulation, although entitled to it. The greater fact, 
therefore, is settled beyond question, that aaotlier course was 
more profitable to the banks than the retaining of their circu- 
lation, so it was withdrawn. This was particularly the case 
with banks in the large cities. 

Although the action of the banks showed coucliisively that 
their profit on circulation was not large, the attack was con- 
tinued. Mr. Knox, the comptroller of the currency from 
1872 to 1883, showed again and again in his reports the 
smalluess of these profits, yet no proof sufficed. The debates 
of Congress were frequent on taking away this privilege from 
the banks, nor is the contest ended. 

One reason, constantly urged, was that the government 



1875.] THE NATIONAL BANKING SYSTEM. 361 

would be the gainer by retiring the bank-notes and putting 
out legal tenders in their place in payment for the national 
debt. Thus the debt and interest charge would both be 
reduced. This was the strongest reason given. 

Another reason was that the banks were profitable mon- 
opolies, and, therefore, not justifiable by our institutions. 
This assertion was not true. It is true, that in the beginning 
the amount was limited to $300,000,000. It is also true that 
Mr. Clarke, the second comptroller of the currency, erred in 
distributing the circulation. Had he executed the law as 
Congress intended, there would have been no inequality. 
Nevertheless, the full amount of $300,000,000 was not 
taken until November, 1868, and in 1870, Congress added 
$54,000,000, beside requiring the old banks to surrender 
$25,000,000 more if this were needed. After that the banks 
took out new circulation, and, in 1874, the maximum limit 
was nearly reached. But after the law of that year was 
passed, permitting banks to retire a portion, or all, of their 
circulation, the attorney-general decided that new circulation 
could be issued in place of that retired, and since that time 
the banks could get all the circulation they desired by deposit- 
ing the requisite security. It was asserted again and again 
in Congressional debate, particularly in the long currency 
debate in 1873—4, that the South needed more currency, and 
that the restriction should be removed. What the South 
really needed was more capital, for there was hardly a time 
when that section could not have obtained more currency if it 
had possessed the capital with which to buy the bonds on 
which the circulation is based. This fundamental error ran 
through that long and tedious debate, one of the longest and 
dreariest during the period covered by this volume. The 



362 FINANCIAL HISTOEY OF THE UNITED STATES. [1873. 

South was i)oor, and needed the impregnation of capital to 
quicken her industries, but no magical power anywhere existed 
for creating it from nothing. If worlds are made from noth- 
ing, as some believe, surely capital is the product of man. 
Government can destroy, but cannot create it. The govern- 
ment might have borrowed capital and loaned it to the South ; 
could have transferred it from one person to another, nothing 
more. 

Among the schemes devised for supjjlanting the national 
bank circulation was the issue of §400,000,000 of legal-tender 
notes, interchangeable, in sums of fifty dollars, for treasury- 
notes, and bearing interest at the rate of 3.65 per annum, or 
one cent per day on a hundred dollars, and a repeal of all Acts 
relating to the resumption of payments in specie. It was pro- 
posed to purchase the bonds of the government with the notes 
thus issued. This scheme was much discussed. The objection 
urged was that the legal-tender notes would be converted into 
interest-bearing notes almost as soon as issued, like the small 
treasury-notes issued in 1815. "The non-interest-beariug 
certificates of deposit," said Mr. Knox, " now held by the 
banks, and amounting to $50,880,000, will at once be con- 
verted into greenbacks, and these, together with $150,000,000 
of cash reserve, also held by the different lianks and bankers 
of the country, will be speedily exchanged for 3.65 notes. 
These latter notes will be used by every clearing-house in the 
country for the payment of balances, and a large proportion 
of the circulation will then consist of the new iuter-couverti- 
ble interest-bearing notes, so that the whole authorized issue 
of these notes will soon be in demand." 

If Congress had favored the scheme, many of the banks 
would have liquidated, and their loans would have been called 



1872.] THE ^^ATIOXAL BANKING SYSTEM. 363 

for the purpose of distributiug their capital and surplus 
among their stoekholder-j. Doubtless many would have reor- 
ganized as State banks and private bankers. 

Opi:)ositiou to the banks A\'as now at its height. Many 
things had happened to inflame the feeling against them. The 
year before a financial st(3rm had swept over the country, and 
the sutfering therefrom was keen and universal. The event 
was largely attributed to the intimate relations existing 
between the banks of New- York City and the members of the 
Xew-York Stock Exchange, whereby the curteucy was sud- 
denly contracted, or " locked up," in the language of the day, 
and brokers -were preferred to merchants by the banks as 
borrowers of money .^ One of these lock-ups had been a mat- 
ter of Congressional investigation in 1872. A director of the 
Tenth National Bank of New York was a special partner in 
three firms, with whom he left his money to be loaned. On 
a day specified he directed them to call in his money, which 
they did. In the afternoon he went to his bank with the 
checks received from the three firms, amounting to $4,100,000. 
He requested the president to put them through the clear- 
ing-house the next morning. This was done, the money 
was paid ; but instead of putting it into the bank on deposit, 
he carried it away. The whole transaction was outside the 
regular and usual business of the bank, and was simply an 
arrangement by which it withdrew over $4,000,000 of legal- 
tender notes from circulation for a director of the concern, 
whose avowed object in having it done, as he himself testified 
before the investigating committee,^ " was to cause a string- 

' The Locking-up Process in the Money Market. The Financier, March 
2, 1872. 

^ House Eeport, No. 5, 42 Cong., third session. 



364 FINANCIAL HISTORY OF THE UNITED STATES. [187a. 

ency in the money market for the purpose of bringing about 
a decline in the price of stocks," of which he was short. " It 
affected not only the banks and the business community of 
the city of New York, but that city being the principal centre 
of the monetary operations of the whole country, the strin- 
gency produced there in the money market extended to other 
cities, and affected more or less injuriously every branch of 
business requiring the use of money throughout the country." 
These operations were repeated more than once, and were 
strongly condemned in every quarter outside Wall street. 
While some of the banks were thus carefully attending to the 
wants of speculators they were less mindful of the wants of 
the mercantile class. An eminent merchant of New York, 
and for several years a member of Congress, related the fol- 
lowing story, which illustrated the discrimination made at 
this time between the two classes of borrowers. A pet firm of 
brokers who went down in the crash of 1873 were found to 
be in debt nearly §15,000,000. That firm had reorganized 
only a month or two beiore, with a capital of one or two hun- 
dred thousand dollars ; but it was able to borrow of banks 
and others, on stock held only for speculation, about §14,000,- 
000. At the same time a commercial firm of long stand- 
ing, and having more than half a million of capital, applied 
to one of the largest national banks for the discount of $24,000 
of business paper having less than thirty days to run, and 
was politely put off with one-half the amount. " The broker, 
for gamblers, got $14,000,000 ; the merchant, for honest busi- 
ness, got $12,000, or less than a thousand for a million." 
The banks that served the speculators first and the merchants 
last were a small minority, but their conduct was so notorious 
as to taint all. The comptrollers of tiie currency fi'om the 



1883.] THE NATIONAL BANKING SYSTEM. 365 

outset did not hesitate to condemn the practice of lending 
money for speculative uses, and to over-certifying checks, 
which was another feature of the same business. This prac- 
tice, though, did not originate with the national banks. In 
the beginning, a certification was not considered as legally 
binding the certifying bank to pay the check. Fur many 
years it simply signified or connoted hardly anything more 
than information, and the amount of the check when certified 
was not charged to the account of the drawer until it was pre- 
sented for payment. After the New- York Clearing-house was 
organized, in 1854, it became the custom to present checks, 
and also bills receivable, or acceptances, on the day of maturity 
at the bank where they made payable for certification. " The 
bill and checks certified were then returned to the bank mes- 
senger who had presented them, and on the following morning 
were transmitted to the clearing-house with other exchanges. 
These certifications were confined for a long time to mer- 
cantile and commercial transactions, and had they never gone 
further would have occasioned no adverse criticism.' The 

' " The system of certifying checks may be said to have originated in 
New York. Only a little over thirty years ago the banks of this city made 
their exchanges but once a week, and this was on Monday morning before 
bankinj; hours. Many shrewd dealers with more wit than capital availed 
themselves of this fact to secure funds not otherwise within their grasp. 
At the beginning of the week, A, B, and C had accounts in three different 
banks; A would obtain B's check, B would secure a like amount of C, and C, 
in turn, of A, and each would deposit the order in his own bank and of course 
draw against it. Thus, without any money, they could draw three thous- 
and dollars and ase it up to Saturday. On this day the money must be 
deposited, as the checks would go in for settlement on Monday morning. 
It was not difficult for each of them, just before the bank closed on Saturday, 
on their checks dated Monday, to borrow of some friend a thousand dollars, 
and this would keep them going indefinitely. 



366 FINANCIAL HISTORY OF THE UNITED STATES. [1888. 

amounts were small, and no losses were likely to arise. After 
stock speculation set in with extraordinary vigor during the 
war, check-certifying became, in effect, a mode of guarantee- 
ing the contracts of stock-brokers with their customers, and 
was practiced by a few banks to an enormous extent. In 
1869 a law was enacted, prohibiting the certifying of 
checks drawn on any national bank in excess of the dra-\\-er's 
deposit therein. The fine for violating the law was the for- 
feiture of the charter and appointment of a receiver. After 
that time the practice diminished, yet did not cease. 

The New-York Clearing-house considered the matter. A 
committee recommended that " in no case shall a check or 
other obligation be certified by a bank, unless the amount of 
it is first found regularly entered to the credit of the dealer 
upon the books of the institution." Though adopted with 
only four dissenting votes, the practice continued, and another 

"Tills was called 'flyinfi; paper,' and, by an easy transition, 'kiting,' as 
it was raising money by the use of paper that had no solid support. Of 
course, it was adroitly disguised, the checks being for odd amounts, and the 
various transactions as much mixed as possible. To prevent such a misuse 
of credit the banks began to send out runners, either to present the checks 
for collection on the day they were deposited or to ask for a certification. 
If the check was certified, it was charged at once to the drawer, and unless 
he hail the money in bank at the close of business liis account would stand 
overdrawn. It was done to prevent kiting and not to facilitate it. It is 
true that from the hour of certification to the close of business the drawer 
of the check had a credit, but the paper was not a kite, as it had the stamp 
of the bank, which represented real capital. 

"After the practice of making daily exchanges c&me into vogue, the sys- 
tem of certifying checks was extended to avoid the carrying of money 
through the streets, and to bring all the settlements together into the 
morning hour. When the clearing-house was established it became still 
more convenient, and no one thought of presenting a check for payment." 
— iV. Y. Journal of Commerce, Nov. 21, 1883, 



1883.] THE NATIONAL BANKING SYSTEM. 367 

law was enacted, imposing a heavy fine and imprisonment of 
the officer, clerk, or agent of a bank who should do such a 
thing. AVlien this «cnt into effect, the banks that were accus- 
tomed to certify large amounts of checks accepted them, 
assuming that an acceptance was not a violation of the law. 
In 1882 Congress enacted that any officer, clerk, or agent of 
a bank who should willfully violate the law with respect to 
illegal certification, or who should resort to any device or 
receive any fictitious obligation, direct or collateral, in order 
to evade its provisions, should be fined or imprisoned, or both. 
There was need of doing something, for the practice had been 
rapidly growing. A bank in New York lost a large amount 
by over-certifying, and the teller who transacted the business 
was indicted, and pleaded guilty, but showed that he had 
acted on the authority of his superior officer. The rigor 
which the comptroller displayed in dealing with the banks 
that violated the law finally led the most prominent offenders 
to abandon their charters and reorganize by the State law, 
which did not prohibit the practice. 

While the comptroller was thus trying to make the refrac- 
tory banks obey the law, the charters of many had nearly 
expired, as their length of life was twenty years. Serious 
opposition existed to their renewal. Although they could close 
and reorganize, this was not an easy thing to do, and involved 
some difficult questions. What the banks desired was authority 
to coutiuue by a mode which would not produce any dis- 
turbance to themselves or the business of the country. The 
Committee on Banking and Currency reported favorably on a 
bill for extending their charters, but Congress was disinclined 
to consider the matter. Mr. Crapo, the chairman of the 
committee, sought to get a time fixed for discussion, but the 



368 FINANCIAL HISTOEY OF THE UNITED STATES. [1882. 

House voted against doing so, and not until the 13tli of May, 
1882, did the discussion begin. In the meantime the charters 
of two banivs had expired, and by the 25th of the following 
February, those of three hundred and ninety-three banlcs 
would expire. On the 1st of October, 1881, two thousand 
one hundred and forty-eight banks were in operation, three 
hundred and ninety-three of which had a capital of only §50,- 
000, ^^hile one hundred and sixty-four others had a capital 
from $50,000 to $100,000, and eight hundred and twenty- 
nine a capital from $100,000 to $150,000. From that date 
to the time of opening the discussion, more -than one-half of 
tlie banks organized had a capital of $50,000 each. They were 
located in the South and West, and were multiplying rapidly.^ 
The first provision of the bill authorized the banks to con- 
tinue for another period of twenty years, provided the share- 
holders owning not less than two-thirds of the capital stock 
consented. If any stockholder did not wish to continue, the 
bill provided for a fair appraisal and sale of his interest for 
cash. The opponents of the banks maintained that the pro- 
posed legislation was unnecessary, because the banks, when 
their charters expired, could liquidate and reorganize. This 
was so, but if they had, tlieir undivided surplus and profits, 
which amounted to $184,000,000, would have been divided, 
and the reorganized ban]<;s would have had only their capital. 
It was very desirable to retain this reserve of earnings. The 
national banking law had wisely provided that every bank, 
before declaring a dividend, should " carry one-tenth part of 
its net profits of the preceding half year to its surplus fund 
until the same " should " amount to twenty per centum of its 
capital stock." The banks having obeyed the law, had the 
■Crapo's Report, No. 253, 47 Cong., first session. 



1883.] THE XATIONAL BANKING SYSTEM. 369 

above sum, after paying |85,845,169 of losses between 1876 
and 1879. This accumulation had rendered the banks strong. 
Depositors felt sure that if losses should occur to the banks 
they would be made good from the surplus, and thus escape 
loss. They were very desirous of retaining their surplus fund, 
and this was the chief object of the measure. Liquidation 
and reorganization of the banks meant, of course, a division 
of it, beside a calling of loans and disturbance of the 
money market. When the State banks went over it was seen 
how much better it was to permit conversion, rather than to go 
through a long process of settlement and reorganizing ; the same 
arguments existed in favor of granting authority to the banks 
to continue, though greatly strengthened by many additional 
circumstances which had arisen during the last twenty years. 
The chief objection to the bill was that it continued the 
privilege to the banks to issue circulating notes.^ One class of 
opponents, led by Mr. Buckner, of Kentucky, desired that 
government-notes not endowed with a legal-tender power 
should be issued as fast as the national bank-notes were with- 
drawn, thus leaving the volume of currency undisturbed by 
the change ; and another class, represented by Mr. Brumm, of 
Pennsvlvauia, wished to substitute legal-tender notes receiv- 

1 Comptroller Knox, in his Ke{)ort for 1882, said, " The profit upon circu- 
lation upon the four and .four-and-a-half per-cent bonds, where the rate of 
interest is six per cent, is not much in excess of three-fifths of one per 
cent, and where the rates of interest are above eight per cent, the profits 
are nominal, and are not sufficient to induce the banks to purchase large 
amounts as security for circulation. Where the profits are so small, there is 
a serious objection to the investment of so large an amount of capital in pre- 
mium, which, in the tase of four-per-cent bonds, amounts to one-fifth of the 
face value of the bonds."— p. 148. See fuller account of the subject. Comp- 
troller's Keport, 1879, p. 123, and Comptroller Cannon's Eeport, 1884, p. 134. 

24 



370 FINANCIAL HISTORY OF THE UNITED STATES. [1888. 

able for taxes and duties, but not resting on a coin foundation. 
Mr. Brumm favored the issue in tlie beginning of -$.360,000,- 
000 of such notes, but Mr. Haseltine, of Missouri, unmindful 
of the teachings of Benton, declared that he would not be 
content with a smaller issue than $1,500,000,000, or enough 
to wipe out the national debt. 

Mr. Buckner, who showed by far the best knowledge of the 
subject of any of the opponents of the bill, admitted that, if 
the government issued the entire credit circulation, it would 
become " fixed," yet he contended that a circulation based on 
credit and not on e(jin, however secured or redeemed, should 
have no elastic power ; " that is, should not be contracted or 
expanded at the will of those M'ho make a profit for themselves 
by loaning it or discounting notes in exchange for it. The 
idea of having a credit circulation that Avill expand or contract, 
according to the demands and the state of trade and commerce, 
is folly and fallacy ('(jmbined. Issue banks are organized 
because they hope to I'ealize profits by loaning their own credit 
and the deposits of their customei's, and not to give facilities 
to the growth of trade and business, except as an incident to 
the profits to be derived from making loans on their credit 
and on their deposits, and the more of their notes they can 
keep out the larger is their income. An elastic credit cur- 
rency is as great an absurdity as an elastic yard-«tick. What 
is most needed for the permanent prosperity of alL kinds of 
Inisincss and all classes of the community is a volume of circu- 
lation which will give steadiness to prices and regularity to 
the movements of trade and commerce." Mr. Buckner 
had most of the weight of modern experience on his 
side in support of his main proposition concerning the 
undesirability of trying to maintain an elastic currency. 



1882.] THE NATIONAL BANKING SYSTEM. 371 

When the Bank of England resumed specie payments in 
1821, it could issue notes Avithout restriction, and ample 
provision was made for their redemption whenever they 
should be presented. During the twenty-three succeeding 
years the solvency of the bank was never questioned, and 
the notes were ahvays redeemable; yet too often it unwit- 
tingly occasioned serious derangements of tlie currency, and 
thereby caused vexations and sometimes ruin to business. 
"Wherein did the bank err ? By the testimony taken by the 
Bullion Committee, in 1810, it was clearly shown that all the 
directors of the bank believed, and so did many of the 
merchants who were examined, that there could not be an 
excess of bank-notes so long as they were issued on the tlis- 
count of good bills, growing out of real commercial transac- 
tions, and running for short- periods. The bank-notes, said 
the directors, would return if not required, because no one 
Avould pay interest for them if they did not wish to make use 
of them. This idea prevailed for a long time, that so long as 
bank issues were based on sound mercantile transactions, and 
were always redeemable, there ^^'as no danger of an over-issue, 
or a derangement of the currency attending such a course. 
And yet it was clearly learned, after much suffering, that 
bank-notes, though based on perfectly sound mercantile trans- 
actions, and al^^•ays redeemable, could be issued in excess, and 
were thus issued, and that very disastrous consequences fol- 
lo^^•ed.' Xevertheless, neither Congress nor the country were 
' One of the first persons to see the error in the policy of the bank was 
Jones Lloyd, afterward created a peer, and better known to us as Lord 
Overstone. More than one eminent British authority has declared that he 
is the ablest writer on banking and financial subjects that Great Britain has 
produced. ^Ve shall describe in his own words the evil con.sequences from 
not understanding the true principle which ought to have governerl Ihe 



372 FINANCIAL HISTOEY OF THE UNITED STATES. [1884. 

ready to substitute government non-legal-tender treasury- 
notes for the bank circulation. 

The " enormous profits " made on their circulation was a 
statement constantly repeated during the debate by the oppon- 
ents of the banks. Though clearly shown to be wrong, no 
amount of demonstration sufficed. Like Goldsmith's school- 
master, though vanquished, they " could argue still." 

The extension was granted, and most of the banks are living 
in the second period of their existence ; nevertheless, a trans- 
formation must take place or they will die. With the reduction 
of the national debt they must retire their circulation, or the 
government must consent to its continuance on another basis. 
Whether it shall be replaced with treasury-notes, or whether 
the government shall guarantee a circulation for a good reason 
and satisfactory consideration, or *vhether the world, in its 
wonderful progress in economizing the use of money, shall be 
able, ere long, to dispense with a promissory circulation alto- 
gether, only a daring prophet would answer. 

bank in issuing its notes. " Ser urity for the ultimate solvency of those who 
imue paper money is confounded with and conceived to be the same thing 
as security for the due regulation of the amount of that paper money — a 
fallacy very prevalent, and from which the most erroneous views arise. In- 
solvency on the part of an issuer affects the specific holders of the notes of 
that issuer, and those only; but improper fluctuations in the amount of pa- 
per issues affects the whole community in common ; they disturb to a greater 
or less extent the steadiness in prices and the regular movements of trade, 
and they tend to derange the equilibrium of exchange with other countries. 
The former evil is local and partial ; the latter is general, affecting the 
wliole country and every individual in it." — Memarks on the Management 
of the Circulation, chap. 3, vi. See also Amasa Walker's article, Our Na-. 
tional Currency, International Eev., 1874, p. 224. 



1863.] COINAGE, 373 



CHAPTER V. 

COINAGE. 

After the suspension of specie payments the regulation of 
the coinage did not much concern Congress for nearly a dozen 
years. The weight and composition of the cent was changed ; 
two, three, and five-cent pieces were added to the list of coins ; 
and persons were to be heavily fined or imprisoned, or both, 
who should make issue or pass " any coin, card, token, or 
device whatsoever in metal or its compounds." Such a 
punitory measure had become needful in consequence of 
the large quantities of bogus devices that were circulated as 
substitutes for the one-cent pieces. They were of the same 
size as the legal cent, contained no nickel, averaged about 
fifty-one grains in weight, and were worth " not mfcre than 
one-fifth of a cent." Not less than three hundred varieties of 
these false and illegal tokens or cents were made and issued 
during the war period.' 

' Mint Keports, 1862, 1863. In 1862 the mint at Philadelphia made 
"a thorough re-examination" of the abrasion of coins. "It may be 
stated," said the director, Mr. Pollock, in his report, " that the silver coin 
averages a loss of one part in 630 ; the half eagle one in 3,550 ; the double 
eagle one in 9 000 ; and tliut, by a cautious estimate as to the proportions 
of the various sizes of coin actually among us, Ihe average annual loss by 
abrasion does not exceed one part in 2,400 ; that is, in times when specie is 
current at par with bank paper, and not lying idle. Let it be observed 
that all experiments hitherto made, in regard to abrasion, seem to have been 
based upon prices not higher in value than the sovereign or half eagle. 



374 FINANCIAL HISTORY OF THE UNITED STATES. [1863. 

When the law of 1857 was enacted, relating to the coinage 
of the cent, the opinion yet prevailed that the quantity of metal 
contained in the piece ought to have a value approximating 
to the value it represented. In reducing the cent, therefore, 
from one hundred and sixty-eight grains to seventy -tv/o, its 
composition was changed to eighty-eight parts of copper and 
twelve of nickel. As nickel \vas worth at that time about 
two dollars a pound, a cent contained nearly half that value 
of nickel. The director of the mint maintained that although 
the change was " well intended," the experience of other 
countries and our own showed this to be an unnecessary 
liberality, and that the money thus used for buying nickel 
was " so much money wasted." ^ In France a copper piece 
called a soios then circulafajd, weighiug a little more than our 
cent, composed of ninety-five per cent copper, and five per 
cent of tin and zinc. He recommended that the law be so 
modified that the cent should contain ninety-five per cent of 
copper, and the remainder of zinc and tin in suitable propor- 
tions. Acting on this recommendation, Congress, in 1864, 
authorized the form, weight, and composition of the cent which 
has since that time been coined. 

None of the coj)per coins were a legal tender until 1864, 
when they were endowed with this attribute to a small degree. 
Tiie next year a notable improvement was made in providing 
for the redemption of the five-cent pieces when presented in 

This has rendered expedient a new esaraination, because the great prepon- 
derance of our specie is in large pieces, which, being less exposed by circu- 
lation, must be judged ))y a law of their own. While one double eagle is 
lying (juiet, five or ten smaller pieces are passing from hand to hand." 
' Mint Report, ISliS. " We have given it away under the mistaken notion 
that valne was essential to secure the cii'culation of our inferior coinage." 



1863.] COINAGE. 375 

sums not less than §100. But why did Congreas refuse 
to redeem all the copper coins ? In London, it was said in one 
of the mint reports urging a wider application of the law, that 
such coins could be had in large quantities at a discount by 
going to breweries and ale-houses for them, but the people 
preferred new ones, and so the mint was kept active, and the 
country was overstocked. Long before, the copper currency 
of Brazil had become so enormous that servants ^vho went to 
market had a heavy load to carr}' each ^vay, copper in going 
and provisions on their return. In 1871 the law was 
broadened to cover all copper, bronze, copper-nickel and base 
metal coinage. By the same law the secretary of the treasury 
was authorized to discontinue or diminish from time to time 
the manufacture and issue of such coins. 

The attempt to secure uniformity of coinage with Great 
Britain was begun before the war, and, notwithstanding that 
event, was continued. In his second annual report, Mr. Chase 
reminded Congress of the importance of establishing uniform 
weights, measures, and coins, and recommended that the half 
eagle of the United States be made equal to the gold sovereign 
of Great Britain in weight and fineness. The Berlin Inter- 
national Statistical Congress,^ held the next year, recommended 
the reducing of the existing units of money to a small number ; 
that each unit should be, as far as possible, decimally sub- 
divided ; that the coins in use should be expressed iu weights 
of the metric system and of the same degree of fineness, 
namely, nine-tenths fine and one-tenth alloy. That body also 
recommended the holding of a special Congress, which should 
be authorized to consider and report concerning the relative 
weights iu the metrical system, of the gold and silver coins, 
' 1 Ex. Doc, Xo. 49, 38 Cung., first session. 



.'j76 FINAKOIAL history of the united states. [1868. 

and to arrange the details of the proposed system. This 
action led to a conferenoe in Paris, in 1867, in which nineteen 
nations were represented. 

The conferenoe proposed a single standard of gold ; coins of 
equal weight and diameter ; of equal quality or fineness, nine- 
tenths fine ; the weight of the existing five-franc gold piece 
to be the unit ; the coins of each nation to bear the names and 
emblems preferred by it, and to be a legal tender, public and 
private, among all. The single gold standard was an Ameri- 
can idva, and other countries, particularly France, assented to 
the adoption of it reluctantly.' 

The Finance Committee of the Senate strongly favored the 
reoommcndations of the conference.^ One of the questions 
considered in their interesting report was, What provisions, if 
any, should be made for existing contracts in the event of 
adopting what the conference had recommended? The com- 
mittee maintained that private debts were made knowing that 
Congress had the po^ver to regulate the value of coins, which 
had been repeatedly exercised, but in no case had " any pro- 
vision been made for enforcing existing contracts in the old 
rather than the new standard." Such, too, had been the prac- 
tice in other countries where the standard had been changed. 
Such, too, was the principle adopted when passing the legal- 
tender law. If made applicable only to future contracts, it 
" would have bankrupted a large portion of the active business 
men of the countxy, where business compelled them to contract 
debts." 

With respect to public debts, the committee maintained that 

'Semite Doc, No. 14, 40 Cong., second session. Supplemental Eeport by 
S. B. Ruggles, Ex. Doc., No. 2()6, 41 Cong., second session. 
2 lluport, No. 117, 40 Cong., second session. 



1870.] COINAGE. 377 

the loan-contract was the only law that ought to affect the 
creditor until his debt was fully discharged. Congress, as the 
authorized agent of the American people, was one party to 
the contract, and could no more vary it by subsequent Acts 
than any other debtor could vary his contract. "As to the 
public creditor, no legislati\'e power stands between him and 
the exact performance of his contract. Public faith holds the 
scales between him and the United States, and the penalties 
for a breach of this faith are far more severe and disastrous to 
the nation than courts, constables, and sheriffs can be to tlie 
private debtor." The public debt was then so large that a 
reduction of three and a half per cent in the standard — \\'liich 
would have been necessary had Congress adopted the recom- 
mendation of the conference — would have reduced the public 
debt §90,000,000. Neither Congress nor the country, nor 
the countries of the Old World, were fully prepared for tlie 
change. 

When Congress next considered the subject of coinage, a 
bill to revise the mint laws was before that body. No revision 
had been made since 1837, and the secretary of the treasury 
had requested Mr. Knox, the deputy comptroller of the cur- 
rency, to revise them. In the spring of 1870, he completed 
the task, and his report was sent to the House.' Among 

' Ex. Doc, Xn. 307, 41 Cong., second session. The Finance Committee 
of the Senate stated the features of the bill in their report, and added : 
" The metliod adopted in the preparation of the bill was, first, to arrange, 
in as concise a form as possible, the laws now in existence upon these 
subjects, with such adilitional sections and suggestions as seemed valuable. 
Having accomplished this, the bill, as thus prepared, was printed upon 
paper with wide margin, and in this form transmitted to the different mints 
and assay offices to the first comptroller, the treasurer, the solicitor, the first 
auditor, and to such other gentlemen as are known to be intelligent upon 



378 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

the amendments proposed in the bill were the establishing of 
a mint bureau in the treasury department, which should have 
charge of the operations of the mints and assay ofBces, and 
the discounting of the coinage of the silver dollar. The 
reason given for the latter amendment in the rejiort accom- 
panying the bill was, that by the legal ratio existing between 
the two metals, the silver dollar was worth a premium of 
about three and a half per cent ; and, consequently, was no 
longer employed in making payments, while the gold dollar 
remained as the unit of account. Subsequently, the secretary 
transmitted to the House copies of the correspondence of the 
department \\itli public officers and other individuals, ^^'hose 
opinions had been solicited in preparing the bill. The bill 
was reported by tlie Finance Committee of the Senate, dis- 
cussed t\\o days and passed, and then sent to the House. Mr. 
Kellcy, of Pennsylvania, who was chairman of the Coinage 
Committee, recommended the passage of the bill. He said 
that it had received as careful attention as he had ever known 
a committee to bestow on any measure. " We proceeded, 
with great deliberation, to go over the bill, not only section 
by section, but line by line, and word by word." An exhaust- 
ive discussion followed, and Mr. Hooper, of Boston, delivered 
an elaborate speech, in i.^'hich he thoroughly explained each 
section. Reaching that relating to the silver dollar, he said, 
" This dollar, by reason of its intrinsic value being greater 

metallurgical and numismatieal subjects, with the request that the printed 
bill should be returned with such notes and suggestions as experience and 
education should dictate. In this way the views of more than thirty gen- 
tlemen wlio are conversant with the manipulation of metals, the manufac- 
ture of coinage, the execution of the present laivs relative thereto, the 
method of keeping accounts, and of making returns to the department 
have been obtained." 



1870.] COINAGE. 379 

than its nominal value, long since ceased to be a coin of circu- 
lation, and is melted by manufacturers of silverware. It does 
not circulate in commercial transactions with any country, and 
the convenience of these manufacturers, in this respect, can 
better be met by supplying small stamped bars of the same 
standard, avoiding the useless expense of coining the dollar 
for that purpose." Mr. Kelley also added, " It is impossible 
to retain the double standard. The values of gold and silver 
continually fluctuate. . . . Hence all experience has sliown 
that you must have one standard coin which shall be a full 
legal tender, and then you may promote your domestic con- 
venience by having a subsidiary coinage of silver which shall 
circulate in all parts of your country as legal tender for a 
limited amount." The bill passed the House by a vote of one 
hundred and ten to thirteen, and, after further discussion and 
amendments by the Senate, was referred to a committee of 
conferencej whose report was adopted. Thus the measure 
received much more careful attention than most measures. 
Congress did not act blindly in discontinuing the coinage of 
the silver dollar. Congress merely put in legal form the pre- 
vious action of the people.' 

' For a fuller account of the action of Congress on this subject, see Upton's 
Money in Politics, chap. 20. " The report of the deputy comptroller of the 
currency, transmitted to Congress, in 1870, by the secretary [of the treasury], 
three times distinctly stated, that the bill accompanying it proposed to dis- 
continue the issue of the silver-dollar pieces. Various experts, to whom 
it had been submitted, approved this feature of the bill. The House was 
informed by its members of this provision, and the bill was printed thirteen 
times by order of Congress, and once by the commissioners revising the 
statutes, and was considered during five successive sessions. If the question 
of the double standard did not become prominent in the discussion upon 
the bill, it was for the reason that usage had established the gold dollar as 
the unit, the silver dollar, on account of its greater relative value, having, 



380 PINANCIAI. HISTORY OF THE UNITED STATES. [1870. 

In the treasury-bill a subsidiary dollar weighing three hun- 
dred and eighty-four grains, and having a limited legal-tender 
power, was recommended. Instead of authorizing this, Con- 
gress authorized a trade dollar, weighing four hundred and 
twenty grains and possessing unlimited legal tender. It was 
coined at the request of merchants and other Eastern people 
who were trading with China, and was not intended for use 
in this country.^ 

Although Congress had discontinued the coinage of the 
silver dollars, the legal-tender quality of those existing was 
not aifected. None, however, had been coined since 1809, 
and long before the enacting of this law they had disappeared. 
Their demonetization came four years later in revising the 
i^tatutes of the United States. The " Revision," as the new 
compilation was called, superseded all pre-existing general 
laws to which it referred. By the revision all the silver coins 
of the United States were declared to be a legal tender for 
payments not exceeding five dollars. This, of course, included 
the silver dollar. As nothing can be taken away from noth- 
ing, it is difficult to perceive how this action of the revisers 
affected anything or anybody, inasmuch as no silver dollars 
were then in circulation and their coinage had been formally 
discontinued. 

■with the Mexican dollar and pistareen, disappeared from the circulation of 
the country. The coinage Act of 1873, and the Revised Statutes of 1874, 
simply registered in the form of a statute what had been really the unwrit- 
ten law of the land for forty years."— Comp. Knox, Report, 1876, p. 54. 

' Act,' Feb. 12, 1873, 42 Cong., third session, chap. 131, sec. 15. Con- 
gress resolved, July 22, 1876, "that the trade dollar shall not hereafter be 
a legal tender, and the secretary of the treasury is hereby authorized to 
limit from time to time the coinage thereof, to such an amount as he may 
deem sufficient to meet the export demand for the same." — Res., No. 17, sec 2. 



18~0.] COINAGE. 381 

Hardly had the new coinage-law been enacted when silver, 
as compared witli gold, fell rapidly in price. Within twelve 
months the quantity of silver contained in a silver dollar could 
be purchased for ninety-eight cents in gold; in 1874, for four 
cents less ; in 1876, the price had advanced to ninety-seven 
and two-tenths cents, and the next year it fell to ninety cents. 
Such a sudden and large disturbance in the price of silver was 
unparalleled. As the people of this country were using for 
a circulating medium only United-States notes and the notes 
of national banks, current exchanges were not aifected by the 
fluctuating ratio between the two metals. The government 
continued to receive gold at the custom-houses, and to disburse 
it in paying the public obligations. No one felt wronged in 
paying or receiving it. The decline in the value of silver 
affected no class except the producers and those who employed 
it in the arts. 

In ]\Iarch, 1875, IMr. Reagan, a member of the House, 
offered an amendment to a bill relating to the issue of small 
silver coins, declaring that the silver coins of the United States 
of the denomination of one dollar, should be a legal tender in 
a payment at their nominal value for any amount not exceed- 
ing fifty dollars. By this amendment the legal-tender power 
of the trade dollars would have been increased from five dol- 
lars to fifty. A month later the Senate amended the bill and 
authorized the coinage of a silver dollar nine-tenths fine, and 
weighing four hundred and twelve and eight-tenths grains troy, 
and which was to be a legal tender to the amount of twenty 
dollars in one payment, except for duties and interest on the 
public debt. The profit from coining this dollar was to accrue 
to the treasury. Each House passed the amendment proposed 
therein, and did nothing more. 



382 FINANCIAL HISTORY OF THE UNITED STATES. [1875. 

The production of silver in large quantity in this country 
beo-an in 1862, but finding a ready market abroad, and also at 
home, for use in the arts, the demonetization of the silver 
dollar occasioned no injury to any person. When Congress 
determined to resume specie payments, and the value of 
silver declined in Europe, then the producers of silver awoke 
to the importance of getting the coinage-law so amended 
as to permit the largest use of silver. If free coinage could 
be adopted, and the limitation on its legal-tender power 
be removed, a larger quantity of silver would be coined and 
used as money, and the value of silver would be sustained 
or enhanced. 

A strong agitation now arose for the remonetization of 
silver. The statement was put forth, and constantly repeated, 
that silver had been stealthily demonetized through the un- 
ceasing alertness of money-grasping creditors. In truth, they 
could have been as justly accused of filling up the Mississippi, 
or of removing the sands of the desert of Sahara. For twenty 
years we had had two standards, not gold and silver, but gold 
and paper, and in most transactions persons had bought and 
sold by the pajaer standard ; no one had ever thought of giving 
or receiving silver ; consequently, when Congress stopped the 
coinage of the silver dollar and demonetized it, a kind of dol- 
lar was erased from the statute book, whose use the people 
had long discarded and quite forgotten. 

The silver producers were joined by a powerful allv, tliose 
who were in favor of an increase in the currency and of pay- 
ing the public debt in silver. In previous chapters we have 
shown how fiercely the resuming of specie payments was re- 
sisted from the close of the war until their consummation, and 
hoAV strong was the sentiment, at times, of discharging the 



1877.] COINAGE. 383 

bonded obligations of the government with legal-tender notes. 
When specie payments were finally resumed, the value of 
a silver dollar was worth considerably less than a gold one, 
and opinion in favor of paying the bonds in silver quickly 
developed.' The silver producers, thus reinforced, were 
strong in number, and the contest they have waged is one of 
the most interesting in monetary history, and of far-reaching 
practical consequences to the government and to the people. 

The chief argument advanced by the supporters of silver 
was that prices depended largely on the volume of money, 
and, consequently, silver should be employed, otherwise a 
grievous wrong would be inflicted on society. Senator Jones, 
of Nevada, was the champion of the movement for restoring 
the use of silver. Through his effort a Monetary Commission 
was created to investigate the subject, of which he was 
appointed chairman. The report of the commission is one of 
the most elaborate and able pleas in support of a cause ever 
made to Congress.^ It was chiefly the work of the chairman, 
and George M. Weston, the able secretary of the commission. 
Both were complete masters of the subject. 

The commission remark, " It is obvious that a violent con- 
traction in the volume of money would have been disastrous 
to all classes of creditors, including nations. This ^^'ould be 
its flrst effect, its more immediate result. . . . Price is the 
expression in money terms of the relation which the unit of 
money bears to a specified quantity, or the unit of each and 
every other thing in exchange. Under a credit system where 
contracts, aggregating a vast amount, to pay money at future 
periods have been made, steadiness in prices becomes the all- 
important consideration, and that steadiness depends on the 

' Senate Eeport, Xo. 703, 44 Cong., second session, p. 93. ' Ibid. 



384 FINANCIAL HISTORY OF THE UNITED STATES. [1877. 

steadiness in the quantitive relation betNveeu money and all 
other things. The performance of contracts to deliver com- 
modities or render services is not made either less or more 
difficult by an increase or decrease in the volume of money. 
But nearly all contracts in the commercial world are for the 
future delivery of money, and the consideration received and 
the promise made in such contracts are based on existing 
prices. The command, therefore, which commodities and 
services may have over money in the future, and which will 
find its expression in price, becomes a matter of vital im- 
portance. 

" Under firmly-established systems the value of each unit 
of either metallic or fiat money depends absolutely upon the 
number of sucli units and the relation they bear to the services 
they are required to perform. The purchasing power of the 
world's entire stoclc of metallic money would neither be 
increased nor diminished by an increase or diminution of its 
magnitude, if other things should at the same time remain 
unchanged. The value of that stock can only be changed by 
an increase or diminution of the things which it is the func- 
tion of money to measure. If the volume of either metallic 
money or accepted fiat money should be doubled, at however 
great or little cost, other tilings remaining the same, the 
aggregate value of neither would be changed, but the value of 
each unit would be diminished one-half. ... It is the mag- 
nitude of that stock relative to the amount of ser\ices it is 
required to perform, that controls the value of each unit of 
either metallic or fiat money." 

The commission then advance a step, and consider the 
influence of "banking expedients" — checks, bills of exchange, 
and clearing-houses on prices. They maintained that m hen 



1877.] COINAGE. 385 

the volume of money was diminished, these expedients must 
diminish, and prices must fall in a corresponding ratio. 
Money was the primary and governing force whose functions 
could not be superseded by any device whatever, and -wdiose 
volume or existence did not depend on banking expedients, 
while these expedients grew out of money and could not exist 
without it. The farthest extent to which they could be used 
was already practically reached, and they could only increase, 
and must decrease, as the volume of money increased or dimin- 
ished.' This reasoning partly applied to the eifect of credit 
on prices. 

That the use of banking expedients can be extended no 
further is a questionable statement, and so is the next, that 
they must decrease with the diminution in the volume of 
money. In Great Britain the paper circulation has been 
slowly diminishing since 1844, yet the banking expedients 
have increased enormously — many times beyond the metallic 
additions to the circulating medium. These expedients will 
increase with the multiplying of banks and the growth of the 
habit of making deposits and using checks. If another dollar 
should never be added to the existing supply, the medium 
that may be employed in making loans and in pa^'ing debts 
may be enormously increased in the ways above mentioned. 

From the beginning to the end of their argument the com- 
mission sought to show not simply that prices were principally 
determined by the volume of money, but by the volume of 
metallic money. We have made the only reference to paper 
money contained in this elaborate report. The idea is ever 

' Concerning the proportion of checks and drafts used in payments to 

gold and silver coin and paper currency, see Comp. Knox's valuable Report 

for 1881. 

25 



386 FINAS^CIAL HISTORY OF THE UNITED STATES. [1791. 

kept before us that the volume of metallic money determines 
prices, while the influence of bank aud government money, 
and bills of exchange, bank checks and credit is carefully left 
almost out of sight. If it were true that prices mainly rest on 
a metallic foundation, then their argument would have been 
conclusive, for the silver portion of that foundation in some 
countries is so large that it cannot be removed without sink- 
ing prices, any more than the land above a mine can retain its 
level if the mineral and supports beneath are taken away. 
When Hamilton wrote in his mint report that " to annul the 
use of either of the metals as money is to abridge the quantity 
of circulating medium, and is liable to all the objections ^^'llich 
arise from a comparison of the benefits or a full, with the 
evils of a scanty, circulation," this state of things existed. 
The first United-States bank had not been created ; only 
three State banks existed, and the quantity of notes issued by 
them was very small. The money then in circulation con- 
sisted chiefly of gold aud silver. To demonetize either metal 
at that time would have inevitably caused a sinking of prices 
and great distress. Such a step would have been criminally 
unwise. For forty years this was the general opinion. Said 
Senator Sanford, in his report, in 1830, "Our system of 
money established in the year 1792 fully adopts the principle 
that it is expedient to coin and use both metals as money, and 
such has always been the opinion of the people of the United 
States." The circulation of the country for a long period was 
chiefly foreign coin, and this is why it was made a legal tender 
and was so conspicuous in our monetary system.^ The ques- 

'Its regulation was an important matter with Congress until 1810 and 
formed the subject of several investigations and lengthy discussions an ac- 
count of which is given in the preceding vol., p. 169. 



1831.] COINAGE. 387 

tion of establishing a correct ratio between gold and silver 
engaged the attention of men, inside and outside Congress, 
from the beginning, and for many years was the chief topic 
of discussion pertaining to the coinage. 

At the time of making the Sanford report, however, some 
persons saw that metallic money was not the only money that 
influenced prices. Bank-notes had come into general use, and 
readily circulated. The notes of the second United-States bank, 
especially, were in high repute, and were everywhere received 
for their face value. These notes had the same effect on prices 
as the gold and silver they represented. Secretary Ingham, 
in his report on the relative value of gold and silver, had 
learned this. So had John White, cashier of the Bank of the 
United States, at Baltimore, who had well studied the matter. 
They clearly saw that the outflow of gold was caused not so 
much by its wrong legal ratio to silver as by its greater value 
for exportation purposes than the paper then in circulation. 
Silver went as well as gold. Foreigners did not want our 
bank-notes, but would readily take our coin. It was another 
illustration of the familiar fact that paper money has no wings. 
As the bank-notes remained at par, their circulation was not 
checked, and prices were not afPected by the outflow of the 
precious metals, for the volume of money remained the same 
or increased. 

At a later period, when the California and Australian gold 
mines were discovered, Chevalier, and others in Europe, 
favored the demonetization of gold, in order to " redress the 
situation." In other words, they favored this change in the 
interest of creditors, but in Europe the proportion of metallic 
money to the whole amount then existing, was far greater than 
the proportion in this country ; consequently, a demonetization 



388 FINANCIAL HISTORY OF THE UNITED STATES. [1853. 

of either gold or silver there would have caused a fearful con- 
traction with very costly results. In this country the question 
was not considered, yet, if the change had been made, the 
results would not have been very serious, because bank-notes 
formed so large a portion of the circulating medium. If the 
effect of demonetizing one or the other at that time had been 
to weaken the superstructure of paper money, then, indeed; 
would the consequences have been terrific to all classes. 
Demonetization in Europe meant the deliberate destruction of 
a portion of the metallic money in order that the value of the 
remainder might be preserved or enhanced. Such a change 
at no time has ever engaged the attention of a considerable 
number of persons in our country with respect to the metallic 
circulation. 

The effect of paper money in influencing prices, and conse- 
quently in diminishing the importance of both gold and silver 
for monetary purposes, was clearly seen by Senator Hunter, of 
Virginia, in his report' on a change in the coinage in 1852. 
" If all the pecuniary transactions of society had been settled 
in currency, and there had been no currency but specie, there 
is reason to believe that the present state of things would give 
unmistakable evidences of the effects of a contraction of the 
currency upon our enterprise and industry. But, since the 
general use of bills of exchange, currency has not constituted 
the only means of settling pecuniary transactions ; and in the 
middle of the seventeenth century, when banks began to be felt 
in commercial affairs, specie has not constituted the currency of 
the world ; but this last has been so largely composed of paper 
that we cannot omit its consideration in any question connected 
with our standard of value. Perhaps no discovery in the 
' No. 104, 32 Cong., first session. 



18'?3-] COINAGE. 389 

whole machinery of commerce has been more important to the 
world than that of the bill of exchange, none which saved so 
much labor in its processes, none which was so eiScient in 
keeping up some approximation between the real and the money- 
standards of the world." . . . But this, he continued, was not 
" the only mode in which paper has diminished the demand for 
■ the precious metals." Bank-notes had been issued, based not 
on the principle of having them rest on a deposit of coin for 
their full amount, but on the capacity of the issuers to redeem 
them when presented. They not only swelled the volume of 
money, but released the use of gold and silver for money 
purposes, and so caused the freer use of it in the arts. 
The size of the price-measure, therefore, was not diminished by 
this process of adding paper money and withdrawing specie. 

During the war, specie payments were suspended, and the 
paper standard deteriorated. But, as we have shown else- 
where, the higher prices were not merely the registration 
marks of depreciation. They were caused partly by the 
enormously increased demand for things. While the suspen- 
sion lasted, a large portion of our specie went abroad because 
there was no use for it here. As the time drew near for 
resuming, it returned in payment for bonds issued in order to 
get it, and for products. No silver accompanied the yellow 
metal. When, therefore. Congress demonetized it, the event 
had not the remotest effect on prices, for no silver was in cir- 
culation, or formed a basis for the paper money then in use.* 
' " It may be confidently stated that, from 1834 to 1873, no silver dollar 
pieces have been presented at any custom-house in payment of duties. The 
entire customs of the country during this period were, with the exception 
of silver used in change, paid in gold coin, and from this fund the interest 
paid upon the public debt has been chiefly derived. It is not probable 
that in the last forty years one of these silver dollar pieces has been 



390 FINANCIAL HISTORY OP THE UNITED STATES. [1876, 

If silver had not become an important product, the vahie of 
which it was desirable to sustain, it is probable that the " dol- 
lar of the fathers " would have henceforth quietly rested with 
the fathers themselves. 

Although the demonetization of money that we did not 
possess could have had no influence on prices, the action of 
Congress did have a prospective effect. Our country had 
become a large producer of silver, and if the coinage-law had 
not been changed, all the silver might have been coined, its 
value better sustained, the volume of currency increased, 
prices advanced, and debt-paying, except in cases requiring 
gold, rendered more easy. These effects of continuing the 
unlimited coinage of silver were so clearly seen that the sudden 
growth of a party in favor of returning to the bimetallic sys- 
tem surprised no one familiar with the currency agitation for 
the fifteen years, or more, preceding. 

A bill was introduced into the House, in 1876, providing 
for the free coinage of silver. The speeches for which that 
formed a text were voluminous. On no financial subject in 
the last twenty-five years did so many small fishes talk like 
whales. Many speakers denounced the public creditor in 
severe and unreasoning terms. The bill was amended, limit- 
ing the maximum amount of coinage to |4,000,000 a month, 
and establishing a minimum of half that amount. Although 

used in this country in the payment of debt, except in certain cases of 
special contract, whUe thousands of millions in gold coin have been used 
to liquidate debts, both public and private. The average amount in 
silver dollar pieces annually coined during these forty yeara has been 
about $160,000. The coin did not pass into circulation, but was chiefly 
used as a convenient portion of silver in the laboratory of the metal- 
lurgist, or was hoarded as an object of curiosity." — Comp. Knox's Report, 
187G, p. 53. 



18HS.1 COINAGE. 391 

President Hayes vetoed the bill, it was passed over his veto 
by both houses.^ No silver could be coined on private 
account ; silver producers obtained a new outlet for their 
silver to the extent of the treasury purchases, while the gov- 
ernment gained the profit between the market price paid for 
the silver and the legal price. One provision of the bill related 
to international action for the restoration of the use of silver. 
During the debate the question of paying the bonds in silver 
instead of gold "«'as discussed. That members of Congress in 
their discussion about the payment of the debt in coin had 
both gold and silver in mind is shown by the record. Their 
views, however, have no bearing on any side of the question. 
It is one of intention between the parties to the contract, and 
these were the United States and the purchasers of bonds. 
What did the government intend to pay and the purchasers 
expect to receive ? Unquestionably gold, because it was the 
cheaper metal. The advocates of silver maintained that the 
intention was to make payment in the cheaper metal, \vhich- 
ever it might be. This was not the fact. The government 
intended to pay, the bondholders expected to receive, gold, and 
the reason for the intention and expectation was because gold 
was the cheaper metal. And it had been for so long a period, 
that neither party thought of paying or receiving the other. 
The government liad paid bonds that matured in 1863 in gold, 
beside many others, long before and since that time. Inter- 
preting the contract by the familiar legal rule of intention, the 
government was bound to pay in gold. Surely this was good 
policy, for a government ought always to deal liberally with 
its creditors in such matters in order to sustain to the highest 
degree of efficiency its money-borrowing power. 

' Act, Feb. 28, 1878, 45 Cong., second session, chap. 20. 



392 FINANCIAL HISTORY OF THE UNITED STATES. [1884. 

The effects of the legislation of 1876 may be briefly con- 
sidered. The effect on prices of increasing the quantity of 
money can never be easily registered, and the effect of the 
silver additions since 1876 are difficult to ascertain, because 
the quantity of money was so large before, and because prices 
are perpetually moving up and down, like the tides of the sea, 
by many forces. It may be questioned whether prices have 
been appreciably effected by the recent coinage of silver. The 
silver commission remarked that the magnitude of the stocks 
of silver and gold in the world was an element of steadiness 
in their value, which had been often overlooked. Their 
steadiness of value arising from this cause, it was maintained, 
would, " of course, become still greater as stocks are hereafter 
enlarged." Admitting this deduction to be correct, the 
quantity of money acting as a measure of prices for a long 
time has been so large that it is hardly probable the recent 
silver increase has affected them. 

Lastly, what has been the effect of the silver additions by 
authority of the law of 1876 on the aggregate value of the 
monetary supply ? This inquiry may be prefaced by repeat- 
ing a remark of the silver commission that, if " the volume 
of eithgr metallic money or accepted fiat money should be 
doubled, at however great or little cost, other things remain- 
ing the same, the aggregate value of neither would be changed, 
but the value of each unit would be diminished oue half" 
This remark approximates as closely to the truth, probably, 
as most economic generalizations, and if it be thus accepted, 
the deduction follows that the injection of silver into the body 
of the currency has increased the quantity without enhancing 
its value. If, however, prices are no higher than, they would 
have been without this increasa it follows that the larger quan- 



1884.] COINAGE. 393 

tity io circulation possesses more value, could be exchanged 
for more commodities, than the smaller quantity previously 
existing. The new silver supply has added to the world's 
wealth, but not to the aggregate value of it, so far as this 
supply has raised prices. Has, therefore, all the labor spent 
in bringing silver from its dark hiding places to the light, and 
in transporting and coining it, gone for naught ? Employment 
has been given to many persons with all the accompaniments 
of production ; the exchange of the silver has effected a wider 
and perhaps more equal distribution of values ; while the 
wealth of the world has in consequence been expanded. 

It will not be questioned, however, that beside the silver 
producer, the private debtor has gained by the change, if 
prices have been inflated by the new additions to the cur- 
rency. His condition, though, did not justify the action of 
Congress. If one believed some of the speeches delivered 
on the Bland bill, he would conclude that the fate of debtors 
was unceasingly hard, and that the remorseless creditor always 
triumphed. History teaches another lesson. In the Jewish 
theocracy the creditor's claim was released after seven years, 
and in intervals of similar length the land was allotted anew 
to the people. Kings of almost all ages have debased their 
coinage at irregular intervals, and if they did this primarily to 
aid themselves, private debtors were far more benefited. 
Statutes of limitation and bankrupt laws exist among all 
civilized nations as means of redressing injuries, squaring 
accounts, and giving the unfortunate another chance in the 
race. The world looks on these measures with approval, 
othersvise they would not stand ; remembering their universal 
prevalence, how imperfect is the vision that discerns favorable 
legislation only for the strong and the rich ! If the mental 



394 PII^ANCIAL HISTOEY OF THE UNITED STATES. [1884. 

strabismus of such persons shall ever be corrected, they will 
experience a joyful surprise of the first magnitude. There 
was no need, therefore, of enacting the sih-er law to aid the 
debtor. The circulation of the currency was exj)anding quite 
enough by additions of gold and bank-notes, and by the more 
general use of those instruments of exchange, which have so 
marvelously economized the use of all kinds of money. 

"With respect to the payment of public debts, there was no 
need of increasing the currency to pay them, for the reason 
that they are not paid, or very slo\\ly. The public debts of 
the Old World, save here and there an exception, are not paid 
at all ; no more money, consequently, is needed for that pur- 
pose. On the other hand, the world's public indebtedness has 
been increasing in a fearful manner for a long period, and is 
not likely to stop with many nations until their creditor-jjower 
is exhausted ; so long as this movement continues, the millions 
who are to receive the money thus borrowed, are to lose rather 
than gain by diluting the currency. The lender, not the bor- 
rower ; the bondholder, not the government contractor and 
workman, will continue to gain most by expanding the 
currency until the balance in the world's debt-account appears 
on the other side of the ledger, and debts are paid faster than 
they are made. Of such a change only two or three of the 
many nations give the faintest sign. Admitting, therefore, 
that an enlarged demand for money enhances its value, unless 
the quantity be increased or its movement be accelerated, as 
European nations do not use much in paying debts, the people 
need not be concerned in that regard, whether the quantity be 
great or small. The short history of increasing the volume 
of money among nations is, borrowing more easily, they have 
contracted more than $25,000,000,000 of debts, and are yet 



1884.] COINAGE. 895 

borrowing. The prophetic genius of Burke is not required 
to predict with confidence what the end of this Himalaya of 
debt will bo. In this country debt-paying has proceeded more 
rapidly, but the amount paid from month to month has been 
so small, and been retained in the treasury so briefly, that it 
would be very difficult to shijw wherein any interest has 
suffered from this policy.^ With respect to States and cities, 
while they make large demands on the people in the wny of 
taxes, the money is immediately put in banks and passes into 
circulation, so that no derangement whatever can be ascribed 
to the use of money for State or municipal purposes. Is not 
this argument, then, for increasing the volume of money, 
because the uses for it are multiplying and enlarging, without 
much foundation ? and are not the sufix^ring and injury 
prophesied if a different policy should prevail, grounded 
in fear or unwillingness to deal justly by those ^vho have 
trusted individuals and nations ? 

Many unquestionably have been injured by accepting wrong 
theories of money as true, particularly that inflation is syn- 
onymous with prosperity and contraction with hard times. 
We are now overshadowed with depression ; men are losing 
wealth ; the best enterprises languish and fail, yet the volume 
of moiifv is increasing. The same thing happened after the 
panic in 1873. During the succeeding six years of depression, 
additions to the currency were frequent, yet the good times so 
anxiously desired did not come. The wants of business did 
not require the restoration of the monetary function to silver ; 
and the spring-time of prosperity would have returned as 
quickly if that ancient and honorable metal had been put into 
the hands of cunning workmen to be manufactured into 
' See Mr. McCuUoch's remark, p. 340. 



396 FINANCIAL HISTORY OP THE UNITED STATES. [1884. 

myriad forms to gratify the tastes of man as by putting 
it into the baser melting-pot of the mint. "When the people 
cease to live in the air in balloons, and become content to 
walk on the firm earth of reality, and sincerely believe that 
true prosperity does not spring from the mysterious manipu- 
lation of stock, and other exchanges, that excessive gains by 
the few are usually acquired by a corresponding loss to a 
larger number, and relinquish their faith in the money quack- 
eries by which they have been so badly duped, their commer- 
cial, industrial, and moral character will be as completely 
revolutionized as the permanent prosperity of the country 
will be assured. 

The action of Congress in 1876 concerning the coinage of 
silver was not satisfactory to many. A large class, especially 
the producers of silver and those who favor an expansion of 
the currency, desired to throw the gates of the mint wide 
open, and professed that no other policy would satisfy them. 
On the other hand, the advocates of a gold standard, and those 
opposed to increasing the currency, did not cease to agitate for 
the repeal of the new law. They declared that the country 
had monev enoug-h, that a a;old standard ouffht to be main- 
tained in any event, and that the injection of silver into the 
currency at the valuation established by Congress would have 
the effect ultimately of transferring the monetary standard to 
the white metal. It was generally admitted that the value of 
gold and silver, like other commodities, depends largely on 
their use, and that if a sufficiently wide market or employ- 
ment for silver could be found, its value would be enhanced. 
Accordingly, attempts were made, through international con- 
ferences, to establish a ratio between the two metals and en- 
large tlie use of silver. A conference was held in Paris in 



1884.] COINAGE. 397 

1878 wlilch was attended by the delegates of twelve nations. 
Those for the United States submitted two propositions : 
1. " It is the opinion of this assembly that it is not to be 
desired that silver should be excluded from free coinage in 
Europe and the United States of America. On the contrary, 
the assembly believe that it is desirable that the unrestricted 
coinage of silver and its use as money of unlimited legal 
tender should be retained where they exist, and, as far as 
practicable, restored where they have ceased to exist. 2. The 
use of both gold and silver as unlimited legal-tender money 
may be safely adopted : first, by equalizing them at a relation 
to be fixed by international agreement ; and, secondly, by 
granting to each metal, at the relation fixed, equal terms of 
coinage, making no discrimination between them." The con- 
ference discussed these propositions and adopted an answer.^ 
At the time of doing this, however, the Dutch delegates were 
not present, the Italian delegates refused to be parties to it, 
and the approval of the other delegates was given with reser- 
vations. In 1881 another conference was held in Paris. 
Fifteen nations were represented, beside Great Britain, British 
India, and Canada. Thirteen sessions were held, and nothing 
was accomplished except to weaken the hope of extending the 
monetary use of silver through international action. 

1 The answer was : " 1. That it is necessary to maintain in the world the 
monetary functions of silver, as well as those of gold, but that the selection 
for use of one or the other of the two metals, or of both simultaneously, 
should be governed by the special position of each State, or group of States. 
3. That the differences of opinion which have appeared, and the fact that 
even some of the States which have the double standard find it impossible 
to enter into a mutual engagement with regard to the free coinage of silver, 
exclude the discussion of the adoption of a common ratio between the two 
meta.]a:'—Intemati(mcd Monetary Conf., 1879, p. 151. 



398 FINANCIAL, HISTORY OF THE UNITED STATES. [1866. 



CHAPTEE YI. 

IIS'TEKNAL BEVENUE. 

Internal taxation began to yield heavily just as the war 
was drawing to a welcome close. For the fiscal year 1866, 
$310,906,984 were collected, a larger amount than was ever 
drawn by a nation from internal sources in tAvelve months. 
Yet this enormous sum was paid by a generation that knew 
no more about internal taxation than about tithes or ship 
money. Though newly laid and heavy, the burden was borne 
for the most part uncomplainingly. Said Commissioner 
Pratt, in his annual report, " We may search in vain in our 
own history, or that of other nations, for such an example of 
patience and patriotism as was exhibited by the people of this 
country in the payment of these extraordinary burdens." 
They were prosperous, and therefore willing to pay. The 
nations of the Old World regarded us with wonder and affected 
sorrow. They concluded from the elaborate net of taxation 
which had been set to catch everything, and from the quantity 
gathered, that the people were fearfully depleted. England 
mourned oftener and more loudly than France, and with less 
hope of our surviving the calamities that had befallen us. 
Both countries were then enduring a heavier load of taxation 
than the United States, considering our resources and pros- 
perity; but, like the old horse in the Eastern fable, heavily 



1866.] INTERNAL EEVENXJE. 399 

laden with pots, pans, stools and the like, that pitied a young 
spirited charger whose sole burden %vas a young lad, France 
and England had borne their burdens so long as to become 
stunned or deadened to their weight. 

Crudely laid as were the internal revenue taxes, they crip- 
pled no considerable industry. They injuriously affected some 
minor industries, particularly those in which alcohol was 
used to a considerable degree in production. As a heavy tax 
was imposed on this article, it increased the cost of all things 
of which it formed an important element. One of the most 
noteworthy of these products was burning-fluid. Once exten- 
sively used, the advance in the price of alcohol from forty 
cents to four dollars, and even more, per gallon, and the cessa- 
tion of the supply of turpentine from North Carolina, put a 
speedy end to this manufacture. The lack of a supply of 
turpentine, however, was quite as serious to the successful con- 
tinuing of the business as the advance in the price of alcohol. 
Just at this time petroleum was discovered, and eveu if the 
most favorable conditions had existed for manufacturing burn- 
ing fluid, it could not have held the ground against the far 
cheaper illuminating agent Nature had prepared for us. The 
cheapness of alcohol had led to its extensive use for fuel in 
manufacturing and in domestic culinary operations, for bath- 
ing and cleaning, for the manufacture of varnishes, vinegar, 
imitation wines, flavoring extracts, perfumery, patent medi- 
cines, white lead, percussion caps, hats, photographs, tobacco, 
washes, dyes, and other preparations for the hair, and many 
other purposes. The great advance in the price of the article 
affected all these products in many ways. The popular hair 
preparations vanished from the market, and the manufacturers 
of patent medicines abandoned their old preparations and in- 



400 FINANCIAL HISTORY OP THE UNITED STATES. [1866. 

vented new ones. A manufacturer of horse medicines who 
used fifty thousand gallons of spirits in 186-3, testified two 
years afterward before the revenue commission that liis busi- 
ness liad been destroyed. Varnish makers and hat manufac- 
turers found substitutes for alcohol. Vinegar manufactured 
from whiskey, which had been produced cheaply, and was of 
excellent quality, was supplanted by cider vinegar. Physi- 
cians and others throughout the country abandoned in greater 
or lesser degree the use of alcoholic extracts, and resorted to 
crude drugs, decoctions, and syrups as substitutes, while an 
attempt was made to keep down the price to the consumer of 
many officinal preparations- which absolutely required the use 
of alcohol by putting them up at less than their proper offici- 
nal strength, thus inflicting a sanitary injury. In all branches 
of the industrial arts wherein the use of alcohol spirits was 
indispensable, and no cheaper substitute could be found, the 
utmost economy in using it was everywhere practiced. Of 
course, sucli a radical change in the use of alcohol diminished 
the quantity needed, affiacting the distiller, the grain producer, 
and many other interests.^ 

If internal taxes ^vcre harmful to some industries, they were 
helpful to others, and enormous fortunes were made from 
their imposition.^ Persons believing that they would be 
levied or raised, and sagacious enough to perceive that prices 
Avould rise far beyond the amount of the tax, bought in 
advance, stored their goods and waited for the decree to go 

' Reports of United States Kev. Commission, 1865-66, Special Report, 
No. 5, p. 10. 

' Ibid., p. 27. How the taxes affected the quantity of liquor drank, and 
tobacco used, see Ibid., pp. 16-19, and D. A. Wells's article in Princeton 
Rev. 



1866.1 INTERNAL EEVENUE. 401 

forth. INIore than one thrifty member of Congress profited by 
discounting; the ac'ti(ju of the s-overnmeut. In no case did 
Congress give a retro-active operation to the law, and by not 
doing so legislated for the benefit of the distiller and the specu- 
lator, rather than for the treasury and the people. With these 
facts lying before us, there was not so much "patience and 
patriotism " in paying taxes as Commissioner Pratt imagined. 
Who would not be willing, nay, eager, to pay taxes, when he 
was sure to receive them back, two, three, or four-fold ? The 
profits realized by the holders of stocks of liquors by an 
advance in the tax on their property was estimated l)y com- 
petent authority at $50,000,000. In July, 1864, the tax was 
advanced from sixty cents to two dollars per gallon. A stock 
of high A\iues and whiskies had been produced in anticipation 
of it, sufficient to meet the demands for a year or longer, and 
on this large quantity a premium was realized in eousec[uence 
of the higher tax from ninety cents to one dollar and forty 
cents per gallon. The imposition of the tax and its subsequent 
advance, in many cases, had a similar effect. The fortunes 
made primarily from internal taxation were not confined to 
whiskey distillers and speculators. Importers reaped enormous 
fortunes. 

Who lost ? The government. INIillions of revenue were 
lost at a time when most wanted by fixing a time so far ahead 
for the law to take effect. This was needful, in some cases, 
but in most of them the tax could have been laid on existing 
stocks without unjustly burdening the owner. Had this been 
done, taxation would have been less popular, yet the govern- 
ment could well have bartered the popularity of the system 
for a more plentiful supply of revenue. Moreover, we should 
remember that, expecting an advance and higher prices, persons 

20 



402 FINANCIAL HISTORY OF THE UNITED STATES. [1866. 

everywhere sought to obtain needful supplies at existing rates, 
and fol- a long time to come. This is the reason why, after 
levying taxes for a considerable period, so small returns were 
received. Willing as the people were to be taxed, they were 
prudent enough to escape paying them as long as possible by 
heavy purchases in advance. Their practice did not square 
with their professions in this regard, and their conduct was 
serious to the government, for the revenues were so much 
lighter than was expected tliat its credit suffered, and it became 
necessary to open new veins of taxation to increase the output. 
Had tlie people promptly paid their taxes under the law of 
June, 1863, and not evaded the burden by unusual purchases, 
nor used the law as a means of accumulating personal 
fortunes at the public expense, we should never have 
enacted the laws of June, 1864, and of March, 1S65. The 
saiz:acitv and economy exercised by the people in the beginning 
proved delusive, and had tlicy thought of the real situation 
they would have seen the futility of their course. For, as a 
revenue must be had, what they did not pay in the beginning 
they paid afterward, and with heavy interest. If Congress 
committed many blunders during this troubled time, the 
people committed one of the costliest in seeking to evade the 
just and necessary operation of the tax laws, thereby giving 
rise to fresh exercises of legislative power, from whicli, in due 
time, sprang the rankest and most disgraceful crop of frauds 
known in our history. 

So long as prices were rising, not many complaints were 
heard from the operation of the system. The law was matured 
with the best wisdom tlie nation possessed, but internal tax- 
ation had not existed for nearly fifty years, the country was 
enormous in extent, and presented far more difficult problems 



1866.] INTERNAL REVENUE. 403 

than would have existed in a smaller one. Who could predict 
how the taxes would affect the taxpayer ? In many cases they 
were thrown forward on other persons, though not always. 
For example, those who paid licenses probably added no 
more for their services or wares in consequence. The sum 
was too small to form the subject of such a calculation. 
Numerous taxes were added to the price of products, and 
trickling down stopped, some with one class of buyers, 
some with another, and many with the consumer. The fol- 
lowing illustration is worth giving. Formerly umbrella and 
parasol makers made nearly all the parts of an umbrella, but 
at that time the business consisted rather in assem)jling the 
various parts which were made by different persons or con- 
cerns. If the sticks were wood, they were made in Phila- 
delphia and Connecticut, partly of native and partly of foreign 
wood, and on the latter a duty was paid. If the supporting 
rod was iron or steel, it was made elsewhere. In like manner 
the handles of carved wood, bone, or ivory, the brass runnei'S, 
the tips, the elastic bands, the rubber of which the band is 
composed, the silk tassel, the buttons, and the cover of silk, 
gingham, or alpaca, were distinct products of manufacture, 
each was of domestic origin, and paid a tax when sold of six- 
per cent ad valorem, or its equivalent. The umbrella manu- 
facturer put the parts together, and paid six per cent on the 
product. All the parts, therefore, were taxed at least twice, 
and those imported, three times, thus adding from twelve to 
fifteen per cent to the cost of the umbrella, while each separate 
manufacturer added from one to three per cent to the cost 
price, in consequence of paying the six-per-cent tax demanded 
by the government of him. In the beginning, in many in- 
stances, the tax was paid by the purchaser as a distinct bill. 



404 FINANCIAL HISTORY OF THE UlSnTEri STATES. [1866. 

The duties on imported goods, as previously stated, were 
advanced enough to equalize the internal taxes, but the adjust- 
ment was not always accurate, and could not easily be. In 
the case of umbrellas, for example, there was such a duplica- 
tion of the taxes paid by the manufacturer that the increased 
duty on the foreign product was not equal to the internal 
tax, and at one time he was " threatened with utter destruc- 
tion." On the whole, manufacturers and others survived the 
inequalities, glaring as they were, and made money while 
prices were rising. Moreover, they finally awakened to the 
fact that a revenue must be had, and, if making money, they 
must pay. 

AVhen prices reached the highest point, and began to 
turn, then discontent over the existing tax system broke forth. 
As soon as the war closed, the government instantly ceased to 
be a (lemander of goods ; the country, on the other hand, had 
become equipped for meeting the public, beside the ordinary 
demand. All knew that production must be lessened, and 
that prices were destined to fall. The crucial time had come. 
While prices were advancing, the tax burden could be borne 
generally without much difficulty ; with receding prices, tax- 
paying was a far more serious matter. The first saving which 
the people thought of making, if possible, in order to strengthen 
themselves against disaster, was smaller taxes. Accordingly, 
a movement of that kind was begun. At every session, bills 
were introduced for repealing taxes, and large reductions were 
made during the next five years. Three reasons favored the 
reduction. First, because a smaller revenue was sufficient ; 
secondly, to relieve the tax-payer ; and thirdly, to remove 
inequalities. Congress might have acted more wisely in 
removing inequalities by readjusting the taxes in many cases. 



1866.] INTERNAL EEVENUE. 406 

instead of wholly repealing them. Complaints constantly 
went to Washington, and Congress thought the easiest way to 
grant relief was to repeal the tax; and, doubtless, it was, 
though by so doing, new injuries were sustained by others. 
Congress ought to have investigated more carefully the effect 
of repealing taxes before acting. Like electricity which moves 
along the line of least resistance. Congress pursued the shortest 
and least laborious method. Rarely have the members of 
that body gone to the bottom of questions ; content to apply a 
temporary remedy, and leave future ills to be treated by 
others. The people who first succeeded in getting taxes 
removed were the happiest, but when reduction had gone on 
three years, a competent authority remarked that the three 
hundred and more millions paid in 1865 were paid with less 
complaint and disturbance than one-half that amount in 1868.^ 
The palpable error was in making exemptions instead of 
diminishing rates. 

The most unpopular of the taxes was the income tax. 
First imposed by Mr. Pitt in 1791, as a war tax, the tax- 
payer believing, like Wilberforce, that war and an income 
tax were wedded together, began to agitate for its repeal as 
soon almost as the firing of the last war-gun. The chief 
grounds of objection to it were, the unfairness of pressure 
on different classes of income, the inquisitorial nature and 
arbitrary power granted to the executive department of the 
government in collecting it, and its demoralizing tendency. 
The inquisitorial nature of the tax, which was, perhaps, the 
crowning objection, applied to it no more than to the city, 
town, county, and State taxes that had been paid from the 
origin of local government. The income tax introduced no 
1 7 In. Rev. Eecord, p. 89. 



406 FINANCIAL HISTORY OF THE UNriED STATES. [1871. 

uovelty in taxation. Did the people object to the property 
taxes assessed by the States and cities ? They were not taxed 
on what they did not have ; nor on what they could not pay. 
The tax was laid on ability suiEcient to sustain the burden. 
Some objected because others deceived the government officials 
and escaped without paying a due share, and the opposition 
to paying was perhaps more deeply grounded in this objection 
than in any other. It was contended that the system of espi- 
onage which was associated with the collection of the tax was 
not only oppressive, but sometimes injurious to individuals. 
In reply to this. Commissioner Delano remarked, "that he 
did not see why this objection might not with equal force be 
urged against all taxes upon personal property. Such taxes 
can not be collected without ascertaining the amount of taxable 
property possessed by the tax-payer. The law imposing a 
tax upon incomes, does nothing more than this, if so much. 
It simply requires a truthful and honest statement of the 
actual income of the tax-payer during the preceding year, 
which can be complied with as easily and with as little expo- 
sure of private afPairs as any other law, national, State, or 
municipal, which is to raise revenue from the personal estate 
of tax-payers." 

However unpopular the tax might be with the tax-payer, 
Congress correctly reflected public opinion in then- action. 
That opinion was lucidly expressed by Senator Sherman : " A 
few years of further exj^erience will convince the body of our 
people that a system of national taxes which rests the whole 
burden of taxation on consumption and not one cent on prop- 
erty or income, is intrinsically unjust. While the expenses 
of the national government are largely caused In- the pro- 
tection of property, it is but right to require uroperty to con- 



IS^l.] INTERNAL REVENUE. 407 

tribute to tlicir payment. It will not do to say that such a 
person consumes in proportion to his means. This is not 
true. Eveiy one must see that the consumption of the rich 
does not bear the same relation to the consumption of the 
poor as the income of the one does to the wages of the other. 
As wealth accumulates, this injustice in tlie fundamental basis 
of our system will be felt and forced on the attention of Con- 
gress." ' 

^Vhy, if a national income tax were so unpopular, it may be 
worth while to inquiA, is a State property tax so well endured ? 
Because the State is less efficient in collecting it, and those 
A\'ho should pay the largest taxes, and who, if doing so, would 
complain the most loudly, to a very large extent evade them. 
A^'hile much injustice was perpetrated under the national 
system by unlawful evasion, thereby increasing the burden of 
those who honestly paid, yet assessments were much more gen- 
eral and complete than they have ever been among the States. 
By far the greater number of income receivers paid, if 
not on the whole amount of their income, on a considerable 
portion of it. Those who escaped wholly, or in part, were 
the exceptions. It is quite near the truth to say that those 
who complained of the law most were the same persons who 
tried in every way to evade its just operation. It was the 
only tax which they could not throw on others, and, notwith- 
standing the strong opposition to it, and the obvious defects 
in the Avorking of the law, no war tax commanded a heartier 
general support, nor was in truth more justly laid. Not every 
one, however, paid the tax reluctantly. The list of incomes 
was generally published, and many a man was delighted to 
let the world know in this way, not of his own seeking, the 

' Speeches, p. 348 ; see, also, his speech in the Senate, Jan. 25, 1871. 



408 FINANCIAL HISTORY OF THE UNITED STATES. [1871. 

size of his annual income. It is true he was often animated 
by other motives beside patriotism. He expected to gain 
substantial advantages by his course. Nor was he usually 
disappointed. His credit was strengthened, and he and his 
familj' were pegged up considerably higher on the social 
register. Had the same spirit animated all income receivers, 
the history of the national income tax would have been very 
different. When the golden harvest was over, and men began 
to lose what they had made, then this annual revelation of 
prosperity was less agreeable. More thSn one man paid a tax 
on a fictitious income in order to sustain his credit. Money- 
making, like the wave movement of the sea, is endlessly varying. 
The larger portion of the war fortunes quickly melted away. 
As personal incomes grew less, men tried to hide the fact from 
the world. The payment of the income tax prevented them 
from shutting the door to effective secrecy. 

One ground of objection to the tax was its unconstitution- 
ality. It was maintained that the tax was direct, which 
required levying in a mode wholly different from that adopted 
by Congress in imposing this. The subject was much dis- 
cussed, and the State courts pronounced contradictory opinions. 
No case involving the question reached the supreme federal 
tribunal. 

All the internal taxes, except those on income and licenses, 
affected prices, though in varying degree. Their effect was 
soon perceived. It was formerly maintained that the best 
kind of a tax was one whose weight would be the most quickly 
and keenly felt, because the tax-payer would look sharply 
after the expenditure in order to make his burden as light as 
possible. This was plausible reasoning ; its truth, however, 
has been contradicted by history. The local governments have 



1865.] INTEENAL REVENUE. 409 

been far more wasteful than the national government in ex- 
pending money, yet have obtained it by direct methods. 
The payment of high war taxes did not lead the people to 
look after expenditures more closely than in other times, and 
they sought relief, not by the better method of economizing 
the national expenditure, but by repealing the taxes altogether. 
They did not stop to reason about their necessit}', or if they 
did, were determined to put the burden as far as possible on 
others. Commissioner Pratt remarked, in his report in 1875, 
" The imposition of an unaccustomed tax upon any article 
entering largely into the consumption of the people has always 
encountered opposition. The reason is plain, as its effects are 
immediately seen in the increased price of the article, what- 
ever it is." The income tax-payers were therefore not alone 
in their demands ; they formed only one section of a large 
army which began the siege against Congress, and will proba- 
bly continue it so long as a tax of any kind remains. 

The first tax to be repealed, was that imposed by the law of 
March, 1865, adding twenty per cent to the tax paid by 
manufacturers.! By the repealing Act of 1866, $65,000,000 
of revenue were abandoned, and .§40,000,000 more by the 
Act of the next year. In 1868, the tax on raw cotton was 
repealed. When first levied, the tax was two per cent, which 
was advanced to three. The increase occurred in 1866, 
and was the only war tax increased after the struggle ended. 
The Internal Revenue Commission recommended an increase 
of the tax to five per cent, but the opposition to this from some 
quarters was very strong." It was contended that the tax was 

' For dates of Acts repealing internal revenue taxes, see Appendix C. 
' See memorial of New York Chamber of Commerce, Senate Mis. Doc., 
No. 109, 39 Cong., first session. 



410 FINANCIAL HISTORY OF THE UNITED STATES. [1867. 

" practically an export duty," and was equivalent to charging 
the cotton grower that amount over the cultivators of cotton 
in India, Egypt, and Brazil. The bill was based on the 
assumption that by collecting $34,000,000 from this source, 
income taxes could be reduced, and also those on crude and 
refined petroleum. A drawback allowance on cotton goods 
of five cents a pound was to be allowed, which would increase 
"the bounty on their production from two to five cents a 
pound." The object of this bill ^va.s to equalize the taxes, 
and it was contended that the tax could be successfully borne 
withi lut endangering the sale of American cotton, because the 
facilities for raising it were so much better than those of other 
countries. The repeal of the tax on cotton ^ was followed, a 
month afterNvard, by the remainder of the tax on manufac- 
tures." The revenue was reduced $1 70,000,000 by the repeal 
of these taxes. The movement for the repeal of the latter 
tax began in Detroit in 1867, and was not favored by the 
manufacturers of New England. " The first men in three of 
our great industries declined to give the movement the sanc- 
tion of their names. Three months afterward the largest 
convention of manufacturers ever held in New Eng-land met 
in Worcester, and to a man demanded the repeal so eifeetively 
that Congress at once responded."^ The gas tax ■\\as cou- 

^ Those who paid the cotton tax tried to get it refunded, claiming that it 
was a direct tax. Mr. Pierce, of Jlississippi, made an able speech in the 
House on the subject. He maintained, 1. That it was a tax or duty on 
articles exported from the several States producing cotton. 2. If it were a 
duty, import or excise, it was not uniform. 3. If it were a direct tax, it 
was not apportioned among tlie several States .according to their respective 
numbers. Cong. Globe, 42 Cong., second session. Appendix, p. 411. 

27 In. Rev. Record, pp. 82, 89. 

' March 31, 1868. 13 Bulletin of "Wool Association, p. 271. 



1867.] INTEENAL REVENUE. 411 

tinued. Two years afterward, Congress reduced the duties 
on imports, extended the free list, repealed the tax on gross 
receipts and on sales, except the sale of stamps for tobacco, 
spirits, and ^^•ines, also the taxes on successions, passports, 
and special taxes, except those relating to spirits, tobacco, and 
fermented liquors. Tlie number of articles subjected to taxa- 
tion Ijy schedule was reduced in four years from two hundred 
and ninety-three to fifty-five. Judge Kelley introduced a 
resolution into the House for the abolition of the internal 
revenue system, and it was adopted with six dissenting votes, 
and in the next Congress only twenty-one votes were cast 
against adopting a similar resolution. Since that time the 
tide against abolishing internal taxation has been receding. 
Judge Kelley and those who voted for his resolution -were 
moved mailily by two motives, relief to domestic production 
and a strengthening of our position against foreign competi- 
tion. As we have seen, the increase of duties in several cases 
was to protect the manufacturer from his foreign competitor ; 
if one part of the system could be retained, and the internal 
burden be removed, American production would be more secure. 
Very generally, therefore, all movements to reduce internal tax- 
ation, have been sustained by those in favor of the widest 
home production ; on the other hand, those in Congress who 
contend for a diiFerent policy have been divided, regard for 
the wishes of their constituents requiring, in many cases, their 
support of bills to repeal internal taxes, though, knowing, 
that by doing so, they were rendering less possible a reduction 
of the duties on imports. 

In dealing with the income tax. Congress, in March, 
1867, raised the exemption from taxation from six hundred 
to one thousand dollars, and a uniform rate of five per cent 



412 FINANCIAL HISTORY OF THE UNITED STATES. [1871. 

was substituted for the different rates of five and ten per cent. 
Three years later, the exemption of one thousand dollars was 
doubled, the five-per-cent rate was reduced one-half, and all the 
harsher features of the law were removed.' The collections 
were to expire the next year; as, however, the time drew near, 
Congress determined to continue the law for two years longer.^ 
The banks, while not tardy in making known their wish 
for a reduction, were not heard with a willing ear. Their 
dividends did not show, at the time of making their first appli- 
cation, that they were suffering more than others ; on the con- 
trary, were highly prosperous. They received a circulation 
on whi(;h a handsome profit was made, and there was a mani- 
fest propriety in requiring them to give a portion of their 
profits to the government in the way of taxes. One of the 
reasons why the banks desired their repeal was to lessen the 
rate of interest, and thus relieve the borrower. Such a keen 
regard for their customers was highly commendable, nor was 
this the first time that individuals and institutions had desired 
to be generous and helpful at the public expense. The history 
of mock-philanthropy is covered with the moss of ages. The 
Finance Committee of the Senate questioned the soundness 
of the reasoning contained in the application. " It is some- 

' A strong attempt was made at this session to repeal the income tax. The 
secretary of the treasury, Mr. Boutwell, was opposed to the repeal. In a 
letter addressed to the Committee of Ways and Means, he said, " It is known 
to your committee, and to Congress, that the Act [of 1870] reducing taxes 
made a larger concession to the payers of the income tax than was made to 
any other important interest of the country. About forty per cent of the 
duties on tea and coffee, and thirty-three per cent of the duties on sugar 
were removed, while more than sixty per cent of the income tax was sur- 
rendered." — Feb. 6, 1871, House Mis. Doc, 41 Cong., third session, No. 70. 

M2In. Eev. Eecord, p. 69. 



1873.] INTERNAL EEVENUE. 413 

what doubtful," remarked Senator Morrill, who presented the 
report,^ "whether or not such a removal would make any 
appreciable diiFerence to the advantage of the customers of 
banks. Banks are, by no means, the sole lenders of money, 
and they are compelled to lend on as favorable terms as can 
be obtained elsewhere, or their loanable funds will lie idle. 
Banking institutions are intended to be, and are institutions 
for the accommodation of the public, but their managers do 
not forget that their stockholders prefer large rather than 
small dividends, and therefore they seek the highest legal rate 
of interest compatible with the full employment of their 
capital. They will demand about the usual market rates. 
The value of money in banks is not exempt from the univer- 
sal law of supply and demand. Exemption from taxation 
would not increase the amount or diminish the demand. The 
rate of interest on capital available for use as money cannot 
■ be reduced except by competition, or except by increasing the 
amount required by borrowers. Those who have money to 
lend, including the banks, will get the current rates for it. 
Though it costs the lender much or little, the price for its use 
will be regulated not by the forbearance of the government, 
but by the demand." The committee believed the abandon- 
ment of national taxes on national banks would not be so much 
a favor to their borrowers as to their stockholders, and the 
latter did not appear to be very greatly oppressed or restrained 
from receiving reasonable dividends. No one pretended that 
banks and bankers were not receiving ample profits from their 
business, and the returns, which showed dividends averaging 
a fraction over ten per cent for several years past, with a con- 
stantly increasing surplus, would have refuted the pretence. 
' Feb. 18, 1873, No. 453, 42 Cong., third session. 



414 FINANCIAL HISTORY OF THE UNITED STATES. [1883. 

An application of tlie law requiring the payment of the tax 
on circulation was made in Northern Michigan, in 1874, 
wholly unexpected to those who issued it. For more than 
twenty years the mining companies in that region had issued 
notes for the payment of wages to their laborers. At first, 
they issued drafts for the precise amount to each man, which 
were drawn on the superintendent, or treasurer, or agent of the 
company, who lived at the eastern or principal oifices. In 
this form they proved somewhat inconvenient to negotiate, 
and so drafts in small denominations, printed like bank-bills, 
were given and circulated. They did not remain long in 
circulation, for the merchants and bankers absorbed them and 
sent them East for payment. The internal revenue depart- 
ment, after delaying ten years, concluded to collect the bank- 
tax on these notes. The companies were clearly in the 
wrong.' The next year, however. Congress relieved them from 
the payment of it, as well as the ten-per-cent tax imposed on 
the circulation of State banks. The tax on State-bank circu- 
lation had a better and further reaching effect than was fore- 
seen in the beginning ; for, after a short time, individuals who 
attempted to pass poor notes as money in regions having a 
scant circulation, were eifectually stopped by the internal 
revenue officers. 

The depression of 1873 was costly to the banks as well as 
to almost every other kind of business ; profits were reduced, 
their surplus melted away, and a much stronger reason existed 
for repealing or reducing the bank taxes ; yet they were con- 
tinued until 1883, and even now the tax of one-half of one 
per cent on circulation, payable semi-annually, remains. 

The tax on matches was not repealed until a late day. The 
' House Repod't, Feb. 22, 1875, No. 260, 43 Cong., second session. 



1883.] INTERNAL REVENUE. 415 

explanation for the long continuing of this tax on an article 
of such general use is one of the most curious in our singular 
experience of collecting a revenue from internal sources. The 
law permitted a reduction of five per cent from the purchase 
price of a certain quantity of the stamps that were affixed to 
the boxes, and a reduction of as much more if the purchaser 
would prepare a die to be used as a private trade mark on the 
stamps. By these regulations, the large manufacturers could 
get both reductions, and the smaller none, and the ad- 
vantage of the former class ^vas very great. The business 
became a monopoly of the worst kind, the Diamond Match 
Company, whose principal office was at Wilmington, Delaware, 
absorbed nearly all the concerns in the broad daylight of law. 
Soon perceiving their advantage over others if the law 
remained, this company vigorously opposed applications for 
a repeal, and succeeded in defeating them until 1883. The 
country well understood the operation of this law. The people 
knew that one company was using it as a bludgeon to destroy 
all others ; and yet Congress remained inert and suffered the 
inexcusable ruin to continue. 

Congress did not forget at the outset to grant an allowance, 
or drawback, on all articles on which an internal tax was 
paid, excej^t raw cotton, refined coal oil, distilled spirits, 
manufactured tobacco, and some other articles, " equal in 
amount to the duty or tax paid thereon, and no more when 
exported." The evidence of the payment of the tax was 
" furnished to the satisfaction of the commissioner of internal 
revenue" by the claimant, and the amount was ascertained 
under regulation prescribed by that officer. When cotton 
goods were exported, the five-per-cent tax imposed on them 
was refunded, and a drawback equivalent to the price of raw 



416 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

cotton used in their manufacture. The objection was raised that 
these heavy drawbacks would enhance the cost of cotton cloth 
considerably more to the consumer in this country than to the 
consumer abroad, but " it should be borne in mind," remarked 
the internal revenue commissioner, "that the tax upon a con- 
sumer here is a very light one ; secondly, that by facilitating 
the export of cotton fabrics rather than of raw cotton, we 
enhance the aggregate value of our exports and thereby cheapen 
the cost of our imports." 

With the repeal of the internal taxes drawbacks have ceased, 
and the only ones that have existed since the Act of March 3, 
1883, are on distilled spirits and tobacco.^ The law relating to 
drawliacks was changed from time to time, in order to prevent 
the perpetration of frauds that will soon be described. In 
1868 the mode of assessing the tax on distilled spirits, Avhich, 
until that time, had not been paid before their going into con- 
sumption, nor on those exported, was changed in order to lessen 
the frauds that had been practiced. The production was taxed 
at the still, but the producer was given a year for payment, 
during which time his product remained in the keeping of the 
government. No portion could be withdrawn without paying 
the tax, and within a year he must withdraw the whole. A 
bond was given, in addition to the tax to secure the govern- 
ment, for double the value of the product. This regulation con- 
tinued for ten years, when the production of whiskey became 
excessive ; and, in order to get relief, the distillers desired an 
extension of the time for paying the tax to three years. They 
asserted that, having learned a lesson, if the relief were granted 
they would not again overstock the market. Congress ex- 

' Keport of Com. of In. Revenue, 1884 ; Drawback Kegulations from the 
beginning to 1867. Ex. Doc, No. 41, 39 Cong., second session. 



1883.] INTERNAL REVENUE. 417 

tended the time as desired for paying the tax, but wlieu the 
three years had expired, the market was more heavily ovcr- 
stoclced with whiskey than ever. The whiskey distillers again 
appealed to Congress, asking for the abolition of the interest 
due on taxes, and a reduction of the bonds to the amount of 
the tax. They renewed their promise of not manufacturing 
in excess of the wants of the market, and Congress granted the 
desired relief, in May, 1880. Instead of decreasing produc- 
tion the quantity became greater each year. The annual con- 
sumption is about 15,000,000 gallons, and, in June, 1882, 
89,962,645 gallons were in store, a supply sufficient for six 
years. The taxes due at that time amounted to $80,000,000. 
In the first session of the forty-seventh Congress the distillers 
rushed a bill through the House extending indefinitely the 
period for keeping their production in bond. This was de- 
feated in the Senate at the next session, though that body gave 
an extension of two years for paying the taxes on the whiskey 
then on hand. The House did not act on this bill, and it 
failed. The owners next thought of exporting it, thus escap- 
ing the tax, and of reimporting it at a future time. The com- 
missioner of internal revenue, Mr. Raum, and Assistant Secre- 
tary French, tried to aid the owners, who were the distillers, 
and also speculators and banks which had loaned money on 
the warehouse certificates given by the government officers to 
those who had deposited it. These officials tried to find a 
home for it in Canada by inducing the Canadian government 
to so modify their customs regulations as to permit the import- 
ation of this whiskey, and thereby enable the owners to 
escape paying the taxes then due. It was virtually a request, 
said one of the best of our newspapers,^ that the Canadian 

' Boston Advertiser, March 28, 1883. 
27 



418 FINANCIAL HISTORY OF THE UXITED STATES. [1867. 

government would change its laws so as to facilitate the eva- 
sion of the taxes coming due on whiskey, which had remained 
in bond to the limit of the law, three years. To say the least, 
it was an unbecoming attitude for these officials to take, in 
view of the refusal of Congress to extend the term of bonded 
whiskey, and so postpone the time of paying the taxes. It was 
hardly necessary to add that the Canadian government did not 
take kindly to a proposition so disgraceful to our officials and 
so humiliating to themselves. The commissioner then assumed 
the legislative function, and extended the time seven months 
for the owners to transport their whiskey from the country. 
This was an exceedingly long time to give, and especially 
when it is considered that he had no right to give any. 

Leaving the reduction in the taxes on whiskey and tobacco 
for later consideration, we shall next consider the mode of 
administering the law. Collection districts were established 
by the President, the law limiting the maximum to the num- 
ber of national representatives. In 1867, when the system 
had grown to its largest proportions, there were two hundred 
and forty districts, each having an assessor and collector. 
The assessor divided his district into a convenient number of 
assessment districts, and in each was an assistant assessor, 
appointed by the secretary of the treasury, who was nomi- 
nated by the assessor and paid from the national treasury. The 
collector appointed his deputies, paid them for their services, 
and was responsible for their official conduct. The assessors 
and collectors also appointed their clerks; but their mode 
of payment was different, the appointees by the assessor receiv- 
ing their pay from the national treasury, and the others from 
the collector.^ 



1867.] INTERNAL REVENUE. 4] 9 

■ At first, there was miicli pardonable inefficiency in admin- 
istering the law in consequence of the inexperience of all who 
were engaged in administering it. Mistakes, involving sums 
varying from a few cents to many thousand dollars, were 
frequent. They ^vere as likely to be in favor of the govern- 
ment as against it. Other difficulties arose from the changes 
in legislation. Regulations would be made and explained, 
and interpretations rendered by the courts, and which, as soon 
as well understood by the officers, became useless, often from a 
chanse of the law. ]\Ianv of these changes were to increase 
or diminish the revenue, and were fully justified, yet they 
added greatly to the difficulty of assessing and collecting the 
taxes. " Next to frequent changes of officers," said Commis- 
sioner Rollins, in 1867, "there is nothing so prejudicial to 
the personal convenience and interest of tax-payers, and so 
productive of loss to the revenue, as frequent changes of the 
statutes." "While officers were employed in introducing a 
new law involving great study and frequent correspondence 
to secure uniformity in its administration, honest tax-payers 
were fretted by obligations to which they were unaccustomed, 
and the dishonest found renewed opportunity for committing 
fraud under the protection of professed ignorance. 

If frauds and errors were frequently committed in assessing 
and collecting the taxes on manufactures and other products, 
they were of small account compared with those on tobacco 
and whiskey. The taxes on these articles were laid with the 
least objection, and their maintenance is based on a solid, 
widespread opinion. Not all, indeed, favor their continuance, 
for not a few believe that persons should be permitted to 
drink, and smoke, and eject tobacco juice under as favorable 
conditions as they can do other things. But these are labelled 



420 FINANCIAL HISTOEY OF THE UNITED STATES. [1867. 

luxurious habits by public sentiment, and, therefore, may be 
discontinued without personal loss, nay, with great gain, and 
falling into this category, they are universally taxed. With 
respect to the producers, we have seen that in the outset they 
favored higher taxation ; nor have they since opposed it, 
except on a few occasions, believing they will sell their com- 
modities, whether the price is high, or low. At other times 
they have not thought seriously about the tax, except when the 
product exceeded consumption. As the tax was advanced, the 
revenue declined, partly from diminished consumption, though 
priucipally from the evading of the law by the whiskey dis- 
tillers. No change in consumption was noted by retailers 
until after the tax was raised above sixty cents per gallon ; 
when the tax was increased to two dollars, the reduction in 
consumption, especially in the thinly settled sections of the 
country, was clearly perceived. As the taxes on whiskey were 
advanced, there was an immediate and very marked increase 
in the consumption of beer, the price of which was not affected 
by taxation to a corresponding degree with the spirit tax. 
In the large towns and cities consumption in the aggregate was 
not diminished by the high rates of taxes imposed on spirits. 
The demand for imported liquors largely diminished because 
of the higher duty imposed on them than on domestic spirits ; 
on the other hand, the sale of American whislicy increased. 
" In fact, the great increase at this time in the price of foreign 
liquors greatly promoted the sale and use of whiskey in the 
Dorthern and eastern sections of the country, and seems to 
have nationalized this liquor as a beverage, and also the term 
bourbon, which then, for the first time, was, in common par- 
lance, generally given to every variety of American whiskey.' 
• Princeton Eev., July, 1884. 



1868.] INTERNAL EEVENXTE. 421 

The frauds began soon after enacting the law, and quickly- 
reached gigantic proportions. A Congressional investigating 
committee, in 1868, declared that if the tax Avere honestly 
paid, $200,000,000 would be collected annually, when, in 
truth, not much more than one-eighth of that sum had been 
received. The members maintained that "with honest and 
efficient officers this tax could be collected." They certainly 
knew where every distillery was located, and cpuld find out 
with reasonable certainty the production of each. A great 
majority of the frauds were perpetrated with the kno^^•ledge 
of the officers appointed to administer the law. One striking 
consequence was that in districts having honest officials, 
whiskey distillation almost ceased, while in the large cities, 
where it was easy to conduct the business in a dishonest 
manner, the number of distillers "wonderfully increased." 
In New York, within a brief period, they multiplied from 
ten or twelve to several hundred, though no one would ques- 
tion the fact that whiskey ordinarily could be manufactured 
more cheaply where the grain was grown. Many frauds 
were consummated through bonded warehouses, and only 
very few of them were located in districts administered by 
honest officials. The whiskey ring soon found out where 
they could store their whiskey and perpetrate their frauds 
without annoyance. 

This ring achieved their first notable triumph when the 
tax was raised to two dollars a gallon, but which was not to 
be levied until February 1, 1865, months after the increase. 
" That law, without aiding the revenue, netted to the opera- 
tors from $50,000,000 to $75,000,000." The dealers kept 
up the price of whiskey until the stock on hand was sold ; 
then, defrauding the government of the tax on new whiskey. 



422 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

sold it from twenty to eighty cents per gallon less than the 
tax, and yet made enormous profits. 

The continued and regular sale of whiskey for less than the 
tax was conclusive proof of an evasion of the law. To pre- 
vent this, Congress enacted that if whiskey were sold for less 
than two dollars per gallon, the purchaser must show that the 
tax had been paid. The price of whiskey immediately went 
down. The best rectifying houses, alcohol distillers, and dnig- 
gists everywhere, dealers, honest as the law and its admin- 
istration would permit them to be, began to violate it. What 
could an honest rectifier do when paying two dollars a gallon, 
if his reckless neighbor paid only one dollar and a half? 
Thus the government actually forced honest men into bank- 
ruptcy by driving them from the business, or into combination 
against the law, and the doing of what they otherwise would 
scorn to do. Many of the best rectifiers in New- York City 
frankly told a committee of investigation that they were com- 
pelled to evade the law, or retire from business. 

The law was easily evaded. Some sellers made out fictitious 
bills at the legal valuation, others sold at the fixed price, and 
made the purchaser a present of enough more to render the 
price paid equivalent to the market price. 

Even the revenue officers did not regard the law in selling 
confiscated whiskey. The statute prohibited the sale of it at 
less than two dollars per gallon, and if it could not be sold 
for that price it must be destroyed; yet, at different sales by 
United-States marshals, it was bid off at two dollars, and the 
purchaser was charged with enough less than the actual num- 
ber of gallons to reduce the price to that prevailing in the 
ordinary market. 

The methods of Congress to prevent frauds proving futile, 



1868.] IXTEEXAL EEVENUE. 423 

the treasury department issued a stringent order that a receipt 
for the tax should accompaii)' all sales. The whiskey ring 
■was not in the least disconcerted by this order, nor was the 
price of whiskey advanced, for very soon tax receipts became 
abundant, and were sold in the market as freely as whiskey. 
The law provided that distilled spirits should be inspected, 
gauged, and approved as soon as manufactured, and then 
removed to a bonded warehouse, and stored until the owner 
wished to withdraw them for sale, ^A•hen he must pay the tax. 
If not sent to a warehouse, the law required the tax to be paid 
immediately. Such spirits, however, could be removed 
from one warehouse to another by giving proper security. 
Tliis regulation was fruitful of fraud. A permit would be 
obtained to transport, say, a thousand barrels, naming the 
destination. Instead of one lot, ten lots would probably be 
started, at different times and by different routes. Should 
either lot be seized on the route, the permit would be offered 
and the whiskey i-eleased ! One lot would go into a ware- 
house, and the remaining nine be thrown on the market 
without paying a tax. The probabilities were that even on 
this lot the tax would not be paid. The owner would take it 
out, giving security therefor on pretence that he wished to redis- 
till it, or change the kind of package, keep it a day, take out 
one-half, bring it back, and the pliant storekeeper would give 
the necessary certificates to show that it had been returned. If 
the owner were determined to pay no tax \\-hatever, an export- 
ation bond would be filed, the whiskey would be put on the 
market, the barrels would be filled with \\ater and shipped. 
In due time, a consul's certificate from the port to which 
it was consigned would be produced to cancel the bond for 
exportation. 



424 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

The governmeut was defrauded of many millions by taking 
worthless bonds. A man of straw would appear as owner of 
whiskey in a warehouse. Bondsmen of the same kind would 
sign as security, make oath concerning the value of their 
property, the collector would approve the bond, and the 
whiskey would be taken and sold. Afterward, on examining 
the bonds, the fraud would be apparent, for the signers would 
have no property. " To such an extent was this carried, that 
bond brokers were numerous who furnished such bondsmen 
for a consideration. The same kind of security would be 
furnished by distillers, so that if detected in their villainy the 
government had no redress." A volume might be filled in 
describing the frauds perpetrated on the government by 
whiskey distillers and dealers during the early years of the 
internal revenue law ; these, though, must suffice until we reach 
another class of frauds of more recent date. 

It ■\\'ould not have been possible to perpetrate them, and on 
a scale so gigantic, if the revenue officers had been competent 
and honest. Too many of them were neither. Store-keepers 
who carried the keys, and assessors who made returns for the 
distillery, were readily bribed. When Congress learned that 
the store-keepers and assessors could not be trusted, and per- 
mitted the removal of M'hiskey without paying the tax, inspec- 
tors were appointed to measure the quantity of distilled spirits 
produced, and to make returns. These officers were paid by 
the distillers. They quickly became the tools of those who 
paid them, and the law authorizing their appointment was 
repealed. Even some of the consuls in foreign countries were 
in league with the whiskey ring. 

To destroy these frauds, which had grown to enormous 
dimensions, and stretched their strong roots in so many direc- 



1868.] INTERNAL EEVENTJE. 425 

tions, was not easy. The harder Congress tried to combat 
them, the more they grew. Every remedy proved unavailing. 
Yet the treatment of Congress was half-hearted and super- 
ficial. First of all, the tax never should have been so much. 
A duty of four cents a gallon was levied on spirits under 
Charles II., and from this point it was increased until intem- 
perate zeal and fiscal rapacity nearly extinguished all receipts 
from distilled spirits ; our government, though with a better 
motive, passed through nearly the same experience. Again, 
all advances should have applied to the present supply ; and, 
finally, the tax should have been paid when the spirits were 
produced, or taken from the warehouse. No excuse should 
have been given to transport spirits for redistillation, or for 
exportation. The distiller should have been required to pay 
the tax before making any use of his products. More than 
all, the ineiSciency of the government in getting competent and 
honest officials to administer the law seems incredible. It 
probably was never so poorly served before, and let us hope 
that this experience will never be repeated.^ 

One of the methods adopted to prevent the distillers from 
defrauding the government was to require them to use a spirit 
meter for registering the quantity of spirit passing from a 
still. Experiments were begun in 1866, under the direction 
of the secretary of the treasury, Mr. McCulloch, for the 
purpose of determining whether any meter existed which 
could be used for that purpose.^ These were conducted at his 
request, by the National Academy of Sciences. In July, 
1866, the committee made a report in three divisions, namely, 

" Van Wyck's Eeport, No. 24, 40 Cong., second session. 

^ For history of this experiment, see Ex. Doc, April 20, 1870, No. 272, 



426 FINANCIAL HISTORY OP THE UNITED STATES. [1870. 

" on proving the strength of spirits," " on gauging the quan- 
tity of spirits," " and on the means of preventing fraud." In 
the last division they expressed their confident belief that a 
spirit meter could be constructed which would " register the 
quantity of spirits passing from a still, and offer a reliable 
check on the distiller and the inspector," and recommended 
the construction and trial of an instrument based on the 
principle of Worthington's water meter. Next April they made 
another report. During the interval they had examined no 
fewer than thirteen meters. After considering all the 
requirements necessary to attain the desired object, and 
critically examining all the inventions and suggestions, 
they said that " the system of records, isolations, and checks 
proposed by Mr. Isaac P. Tice, of New York," offered " the 
most probable prospect of success," and recommended " the 
adoption of the meter and system shown by him." The 
treasury department did so, and required the distillers to 
deposit money or bonds to pay for them, and they were 
attached under the joint supervision of the manufacturer and 
the officer of the government. Before long, however, their 
imperfections were discovered. They did not correctly regis- 
ter the flow of spirits, and were kept in order only by the 
exercise of great care. In a few years they were removed, 
and, in 1872, the law conferring authority on the commis- 
sioner of internal revenue to require the distillers to use them 
was repealed. Then the distillers endeavored to make the 
government reunburse them for their outlay.^ The distillers 
had reimbursed themselves for their meters, as they had for 
other machinery purchased, by obtaining more for their pro- 

^ House Report, No. 69, 42 Cong., third session, letter from Com. of In. 
Eev., April 2, 1870, Ex. Doc, No. 272, 41 Cong., second session. 



1870.] INTERNAL REVENUE. 427 

ducts. The claim was one of the least inequitable, probably, 
ever presented to Congress, and was safely buried in due 
season. 

Beside the ordinary machinery for collecting the revenue, 
some extraordinary machinery was devised, the description 
and operation of which must not be wholly passed (jver. 
Collecting revenue by contract is an ancient method ; in this 
country very sparing use was made of it until 1873. The 
first contract was made in 1855, with a man named Rector, to 
collect a judgment in favor of the government, who was to 
receive one-third of the amount collected. Another contract, 
of a similar nature, was made in 1858, and a third five years 
later, and two others in 1867. The next year several contracts 
were made to recover the proceeds of cotton and Confederate 
property. Early in 1869, the secretary of the treasury, ^Ir. 
Boutwell, concluding that no law existed for making such 
contracts, abrogated them. The next year, however. Congress 
enacted a law authorizing the secretary of the treasury to make 
contracts within prescribed limits, for the recovery of " dere- 
lict property in the States lately in rebellion ; " thus authorized, 
several contracts relating to the recovery of it were made 
during the next five years. 

The conduct of these contractors was not creditable to 
themselves or the government, and the secretary of the 
treasury wrote to the Committee of Ways and Means, that 
" the law allowing shares to officers and informers in internal 
revenue cases ought to be repealed, and district-attorneys be 
deprived of all pecuniary interest in the cases of the govern- 
ment, originating in or in behalf of the government." * 
Accordingly, Congress abolished all moieties to internal 
1 May 25, 1870, Ex. Doc, No. 283, 41 Cong,, second session. 



428 FINANCIAI. HISTORY OF THE UNITED STATES. [1878. 

revenue informers, yet into one of the appropriation bills 
was engrafted an innocent provision, authorizing the secre- 
tary of the treasury to employ not more than three persons to 
assist the proper officers of the government in discovering 
and collecting any money belonging to the United States, 
whenever the same should be withheld by any person or cor- 
poration, upon such terms and conditions as he should deem 
best for the interests of the United States, who were to be paid 
only from the property or money they secured. The history 
of this piece of legislation, whereby the action of Congress in 
abolishing the moiety system was not only revived, but con- 
verted iuto a monopoly, is extraordinary. An ex-member 
of Congress appeared before the Committee on Appropriations, 
and desired the incorporation of the above-mentioned pro- 
vision into the legislative, executive and judicial appro- 
priation bill. Fresh ^^'ith the experience of informers and 
special agents of the treasury, the Committee on Appropria- 
tions were unwilling to comply ^\'ith the ref^uest, but the 
committee of the Senate were more compliant, and that body 
amended the bill as desired. It came back to the House for 
concurrence, and, failing there a second time, went to a 
committee of conference. At this meeting it was agreed to 
let the amendment stand, with the further provision that no 
person should be employed to collect any claim who did not 
first fully set forth, in a written statement under oath addressed 
to the secretary of the treasury, the character of the claim 
which he proposed to recover, and imposing a fine in case any 
person should have the temerity to violate the law. Thus 
amended, the bill passed, the House squirming, and giving a 
majority of only ten votes. The law would not have passed 
had it not been incorporated in an appropriation bill, but the 



1873.] INTERNAL EEVENUE. 429 

desire to eat the oyster was so strong that the members, in 
order to gratify it, consented to swallow the shell. One of the 
members of the Conference Committee, Mr. Niblack, refused 
to sign the report, for it seemed to have the " odor of a job," 
and he feared that " sometime or other he should hear of this 
matter again, in some way which would not be creditable to 
the government." 

Neither he nor others had long to wait. " The law was 
lilte nitro-glycerine in strong hands." A contract was made 
first with Mr. Kelsey, the member of Congress who proposed 
the amendment to the bill, and who did nothing ; afterward 
-with two others, whose transactions need not detain us, and 
then a fourth contract was made Avith John D. Sanborn, of 
]\Iassachusetts. He was at that time employed by the govern- 
ment as a special agent. The first contract given to him was 
for the collection of taxes, illegally withheld by thirty-nine 
distillers, rectifiers, and purchasers of whiskey. Next he ap- 
plied to have the names of seven hundred and sixty persons 
added to his contract, who, he alleged, had withheld taxes 
impaid on legacies, successions, and incomes. These were 
added on the 30th of October. In March, the following year, 
two thousand names more were added, including those of 
three hundred and fifty foreign residents. In July there was 
finally added the names of five hundred and ninety-two rail- 
I'oad companies, " for taxes upon dividends, and interest paid 
upon bonds." This was the entire list of railroads taken from 
a railroad manual. In making his application, his modesty 
had not altogether perished, for he knew of the delinquency 
of only one hundred and fifty of them, but when he told the 
officers of the treasury department this, they replied, " It did 
not make any diiFerence, and to put them all in ; " and thus 



430 FINANCIAL HISTOEY OF THE UlSilTED STATES. [1874. 

contraots grew more rapidly than any flower by the cunning 
art of the magician. Mr. Sanborn had now a contract to execute 
large enough to have appalled a less adventurous being. 
Possibly the treasury department thought so, and this may be 
the reason why " the whole poAver of the internal revenue 
bureau, as well as the entire machinery of the government for 
the collection of taxes, was placed at the disposal of Sanborn." 
Certainly such assistance was wondrously kind, and, doubtless, 
Mr. Sanborn fully appreciated the unexampled favor. Sanborn 
collected .§427,000 of taxes, and the entire country was con- 
founded with this unique business. Those were extraordinary 
times in administei'iug the government, and the people were 
accustomed to new and curious things ; indeed, they had not 
become completely calmed from the effects of war. Reckon- 
ing day finally came, and a committee of investigation asked 
the leading officers of the treasury department to explain their 
conduct. The committee, " feeling alarmed," they said in 
their report, " at the apparent looseness with which the law 
had been administered, had before them the secretary, Assist- 
ant Secretary Sawyer, and the solicitor of the treasury. The 
secretary gave but little information, and exhibited an entire 
want of knowledge as to the manner of making the contract, 
administering the law, or of the provisions of the law itself. 
His only connection, so far as he could remember, with these 
transactions, was in affixing his signature to the various papers 
presented to him as a mere matter of office routine, without know- 
ing their contents. The assistant secretary disclaimed any par- 
ticular knowledge of the law and contract, and he, in like man- 
ner, affixed his signature as a matter of office routine. The 
solicitor who prepared the contract declared that he ' had con- 
sulted in every instance with the secretary or the assistant 



1874.] IXTERXAL REVENUE. 431 

secretary of the treasurr ; that he had in all cases simply obeyed 
the directions of liis superior officers, and that the contracts and 
the various orders of the department were well known to the 
secretary and assistant secretary.' " 

The committee looked with serious apprehension upon the 
apparent attempt of each of these gentlemen to transfer the 
responsiliility from himself to others.^ Nevertheless, no evi- 
dence during the long and thorough investigation jJroved 
that either of these officers had been influenced bv corrupt 
motives. The transaction is the more singular, because the 
secretary had been so careful previously to the enacting of the 
law of 1870, in making contracts for collecting revenue from 
delinquents. The duties of his office were extremel}- arduous, 
and these contracts were regarded by him at the time they 
were made as small affairs compared with many others which 
daily engaged his attention. One fact is certain, the people 
were ashamed and indignant when they learned that such 
things could happen in administering the government. 

Was not Sanborn an extraordinary man in scenting so many 
delinquents, even though the number were not so great as 
stated in his contracts ? The committee told how this hunter 
succeeded in bagging so much game. " The information fur- 
nisliod by the paid officers of the government on which col- 
lections were made was placed at the disposal of Sanborn, 
who, availing himself of information paid for by the govern- 
ment, obtained a contract for the collection of the many claims 
thus brought to light and found to be due to the government." 
Furthermore, all, or nearly so, of the taxes collected by San- 
born were not properly matters of contract under the law, 
and would have been collected by the internal revenue bureau 
1 House Eeport, No. 5.39, 43 Cong., first session. 



432 FINANCIAL HISTORY OF THE UNITED STATES. [18T5. 

in the ordinary discharge of their duty. Lastly, the commis- 
sioner of internal revenue, whose duty consisted in collecting 
the internal revenue, was utterly ignored in this disgraceful 
business, and a letter that he wrote to the secretary of the 
treasury protesting against the manner of these collections was 
never answered. 

If the experiment of collecting taxes by contract was 
regarded with shame by the people, so were the more exten- 
sive frauds which wore discovered during President Grant's 
second administration, and which had been practiced for 
a long time by the whiskey distillers and rectifiers of St. 
Louis, Chicago, and Milwaukee, through the assistance of 
numerous officials of the government. Their security from 
exposure and immunity from punishment, at first obtained by 
contributing liberally toward the presidential expenses of the 
Republican party in 1872, were afterward continued by pay- 
ing the officials, who were especially charged with ascertaining 
and collecting the tax. As the scheme of defrauding widened, 
more official support became necessary, and this Avas gained 
without difficulty. When I\Ir. Bristow became secretary of 
the treasury, he learned through the editor of the St. Louis 
Dem(jcrat of the existence of this double-headed fraud, one 
head existiner in Wasliino-tou, and the other in St. Louis. 
The office of the commissioner of internal revenue was lined 
with members of the whiskey conspiracy. The secretary, 
therefore, quickly perceived that he could not look to the 
regular administrators of the law for assistance. Maintaining 
silence, as far as possible, he employed others outside the 
treasury department to collect the evidence against the wrong- 
doers. When all had been made ready, the exposure came. 
A large number of prominent distilleries and rectifying estab- 



1876.] INTERNAL REVENUE. 433 

lishments were seized, the commissioner of internal revenue 
^yas summarily dismissed, and, shortly afterward, numerous 
indictments were found, followed by arrest. McDonald, the 
supervisor for Missouri, Joyce, the special revenue agent, and 
Avery, who, only a short time before, had been chief clerk of 
the treasury department, and McKee, the proprietor of the 
St. Louis Democrat, were among the number. Many of those 
arrested pleaded guilty, and were fined or imprisoned, or 
both. Those above mentioned were tried, convicted, and 
imprisoned. After Jcyee's conviction, he obtained permission 
to make a speech in exculpation of his conduct. Beginning 
with a denial of his guilt, he proceeded to denounce his 
enemies, and compared the reform movement to an " epi- 
demic," which had " risen, like the mist of a mighty flood ; " 
nevertheless, he comforted the downcast and despairing who 
heard him, by assuring them that " the flood, even then, was 
settling into its former bed, where the crystal waters shall 
again reflect the green foliage ; the oak, and the sycamore, 
and the gentle breezes and birds of spring shall make merry 
music in the cathedral aisles of a generous nation ; " and so, 
under the cooling shade of his rhetorical foliage, he went to 
prison. 

Thus the work of indicting, trying, and convicting pro- 
ceeded in a most gratifying manner to all who believed in an 
honest government. No one, perhaps, rejoiced more heartily 
over these events than the President himself He had said to 
Mr. Bristow, " Let no guilty man escape," and these words 
had acted like magic on all who were concerned in bringing 
the offenders to justice. The circle of the suspected constantly 
enlarged, until General Babcock, the President's secretary, 
was found within it. Then the attitude of the President 

28 



434 FINAN-CIAL HISTORY OF THE UNITED STATES. [1876. 

toward Mr. Bristow and others engaged in the work of 
prosecution changed. The President stood by his secretary, 
as firmly as did Pindar by the Hellenic mythology. He 
would not believe ill of him. It is true, General Babcock 
asserted his innocence, and desired a speedy trial. After a 
little reflection, however, he preferred to vindicate himself 
before a court-martial, and one was ordered to convene at 
Chicago. In the meantime, he was indicted by the grand jury 
at St. Louis, and a day was fixed for his trial. The evidence 
was not sufficient to convince the jury of his guilt, and he was 
acquitted. AYhcther he really was guilty need not concern us 
here. Two or three facts, however, are worth adding. The 
first of these is, when he learned of the prosecution against 
him, he telegraphed to St. Louis declaring his innocence, 
promising a full explanation of his correspondence, and 
demanding a trial at the earliest moment. At the same time, 
he telegraphed to another person, who was to convey the 
message to his counsel, " Tell him to employ assistance, if he 
wants, but to prevent my going there now at all hazards.." 
None of his correspondence with McDonald was produced nor 
explained, and only a small portion of that with Joyce. His 
counsel fought to the utmost to exclude everything they could. 
Their course certainly did not square with his assertions of 
innocence and professions of eagerness to explain all that he 
had said and written. In truth, no public explanation was 
ever made.' 

The difficulties of the prosecution were enhanced by an 

order issued by the attorney-general of the United States, and 

directed to the district-attorney in charge of the case, that no 

immunity from subsequent prosecution should be given to 

'The Nation, Nov. 25, 1875. 



1876.] rSTTERNAL EEVENUE. 435 

guilty persons who might be inclined to purchase their safety 
by turning State's evidence. The object of this was too clear 
to be misunderstood. The government desired no further 
revelations, it had had enough. The attorney-general after- 
M'ard explained to an investigating committee of Congress M'hy 
the order was given, and to their report ^ must the reader go 
who wishes to pursue any further this sad episode of com- 
mingled official and private fraud. 

General Babcock and his friends were numerous and power- 
ful enough to make the cry of persecution effective, and to 
lessen the President's regard for Mr. Bristow, and his efficient 
coadjutor, ]Mr. Wilson, the solicitor of the treasury. The 
relations between them and the President became strained, 
and both, not long after General Babcock's trial, resigned. 
"With their exit, the reform movement quickly passed away, 
and ere long " the gentle breezes and birds of spring " «ere 
heard by Joyce and his fellow prisoners, for they were par- 
doned, and thus his prophecy, which caused so much merriment 
vrhen uttered, was literally fulfilled. 

It would require many pages to describe all the frauds 
peqjetrated on the government in assessing and collecting the 
whiskey tax. One device was to wash the stamps used by the 
government and put them on again ; another way was to get 
the barrels that had been properly passed and refill them; 
the mere mention of these frauds must suffice. One other, 
however, deserves more notice, that of illicit distilling. It 
has always been practiced to some extent, but, after the war 
closed, it increased in the more sparsely populated portions 
of the country, and, especially, in the mountainous regions of 

1 House Mis. Doc, No. 186, 44 Cong., first session. See, also, McDonald's 
Secrets of the Great Whiskey Eing. 



436 FESTANCIAL HISTORY OF THE UNITED STATES. [1878. 

West Virginia, Virginia, Kentucky, Tennessee, North and 
South Carolina, Georgia, Alabama, and in some portions of 
Missouri, Arkansas, and Texas. The annual loss to the 
government had been quite equal to the annual appropriations 
for collecting the entire revenue tax. lu these regions were 
about five thousand copper stills, many of which were, at 
certain times, lawfully used in producing brandy from apples 
and peaches, and, at others, in the illicit manufacture of spirits. 
This business was conducted by a determined set of men, 
who leagued together to defend themselves against the officers 
of the government, and, at a given signal, were ready, in their 
various neighborhoods, to come together with arms in their 
hands to drive the officers of internal revenue out of the 
country. The collectors were supplied with breech-loading 
carbines, but the enforcement of the laws was a perilous 
undertaking. Much of the opposition was the continued 
feeling of hostility to the government, notwithstanding the war 
had long since ended. In some of the districts where illicit 
distilling was extensively practiced, leading citizens were 
either directly interested in the business, or were in active 
sympathy with the distillers, and the officers of the law 
received little aid or encouragement from the people in collect- 
ing the revenue, and in arresting and punishing offenders. 
In some cases, the State officers, including judges on the 
bench, sided with the illicit distillers, and encouraged the use 
of the State courts for prosecuting the officers of the United 
States on all kinds of charges, with the evident purpose of 
obstructing the enforcement of the laws. The illicit distillers 
" on numerous occasions " fired on the federal officers. The 
commissioner of internal revenue, in his annual report for 
1878, from which the foregoing account has been taken, 



IS'J'S-] INTERNAL REVENUE. 437 

added, "that when tlic officers of the United States were 
shot down from ambuscade, in cold blood, as a rule, no 
eiJbrts ^\-ere made on the part of the State officers to arrest the 
murderers; but, in cases where the officers of the United 
States were engaged in tlie enforcement of the laws, and had, 
unfortunately, come in conflict with the violators of the law, 
and homicides had occurred, active steps were at once taken 
for the arrest of such officers, and nothing was left undone by 
the State authorities to bring them to trial and punishment." 
The commissioner, however, relaxed no efforts, and during the 
next twelve months enforced the law ^vith greater success. 
In a period covering a little more than three years, " three 
thousand one hundred and seventeen illicit distilleries were 
seized ; six thousand four hundred and thirty-one persons were 
arrested for illicit distilling ; twenty-six officers and employees 
were killed, and forty-seven wounded, \\lnle engaged in enforc- 
ing the internal revenue laws." Such is the brief story of the 
last great fraud perpetrated by the whiskey distilling interest. 
In regard to the frauds of other whiskey distillers, the 
method adopted in 1868 of measuring the product at the 
still, and of requiring the payment of a tax on that quantity, 
together with a selection of better officers for administering 
the law, caused a marked improvement, and since that time 
no hea^-y frauds of that nature have been committed. The 
quantity produced was accurately ascertained and the taxes 
were collected, except when the government otherwise directed, 
or an occasional failure or destruction of the product occurred. 
The revenues of the government fell off so much after the 
depression of 1873 that the expediency of increasing the tax 
on whiskey was discussed in many quarters. The next year, 
the distillers, believing that the tax would be increased, with- 



438 FINANCIAL HISTORY OF THE UNITED STATES. [1875. 

drew from the warehouses a large quantity, by paying the tax 
in order to get the benefit of the increase. In January, 1874, 
5,430,021 gallons were withdrawn, and 11,504,356 gallons 
the following month. The tax was increased from seventy to 
ninety cents a gallon, March 3, 1875. The withdrawal of so 
large a quantity swelled the revenue for that year, but less was 
paid in 1875. Seven millions of gallons of spirits were in the 
bonded warehouses at the time of enacting the law, yet as the 
increased tax of twenty cents per gallon was not assessed on this 
quantity, the government lost $1,400,000.^ This was a need- 
less sacrifice of revenue at a time when it was much wanted. 

Turning now to the collection of the taxes on tobacco, it 
may be remarked that the legislation on this subject for the 
first five years was largely experimental, and necessarily so. 
As most of the tobacco consumed here was a domestic product, 
and such taxes had not been previously levied. Congress had 
no guide to follow in determining what rates to adopt, or 
what mode would prove the most popular and effective in 
collecting them. Many laws were passed with the view of 
collecting a larger revenue, aud in a more eifective manner ; the 
rates of taxation raised on diiferent grades of manufactured 
tobacco were from two cents to forty cents per pound, and 
snuff, from twenty to forty cents per pound, and on cigars, 
from one dollar and a half to forty dollars per thousand. A 
tax was also laid on the leaf in the beginning, but this was 

' Com. Pratt's Report, 1875. " While legislation is pending, extraordi- 
nary efforts are made by the distiller and manufacturer to secure the benefit 
of the existing low rate to as large a quantity of their distilled and manu- 
factured product as possible. After the law increasing the rate has gone 
into operation the market is supplied for a time with the surplus taxed at the 
low rate, and several months usually elapse before this surplus is exhausted, 
and the revenue flows again naturally in its accustoir.cJ channels." Ibid. 



1876.J INTERNAL EEVENUE. 439 

soon repealed. By some of the earlier laws the tax was made 
partly specific, and partly ad valorem, for the purpose of 
making the quality and price elements in determining the 
amount of tax that should be paid on a given quantity. This 
mode of levying the tax did not prove successful, and in July, 
1868, the mode of collecting all taxes on manufactured tobacco, 
snuif, and cigars by means of stamps was adopted. The tax 
was made specific in all cases, and uniform on all cigars of 
five dollars per thousand ; on cigarettes weighing not exceeding 
three pounds per thousand, one dollar and a half; on snuff, 
thirty-two cents per pound, and on all smoking and chewing 
tobacco two rates, one of sixteen cents per pound, and the other 
twice as much. This law was the outcome of careful study, 
and many of its provisions were recommended by persons 
engaged in the manufacture and sale of tobacco. The tax 
on manufactured tobacco, except snuff, was afterward made 
uniform at twenty cents per pound, and more stringent pro- 
visions were enacted to enable the government to control the 
movement of raw or leaf tobacco, and to prevent its sale for 
direct consumption, either by dealers or growers. At a later 
period, as more revenue was required, the rates on the several 
kinds of tobacco were increased twenty per cent. 

Although the tax was levied on the manufactured product, 
and made payable by the use of stamps, which were attached 
when the tobacco was sold or removed from the place of 
manufacture for sale or consumption, it was added to the price 
and paid in the end by the consumer. The government main- 
tained that, as the burden of the tax was thus distributed 
among the millions of voluntary consumers its weight could 
not be seriously felt, so long as it was not excessive in amount, 
and was uniformly and thoroughly collected. 



440 FINANCIAL HISTORY OF THE UNITED STATES. [1878. 

In 1878 it was proposed to reduce the tax on tobacco one- 
third, or from twenty-four cents to sixteen cents per pound.* 
The reasons for the reduction were that the decrease would 
stimulate consumption and not diminish the revenue, and that 
the present rate depressed the value of leaf tobacco in the 
hands of producers, and consequently that they would be 
benefited by the reduction. These reasons were assailed by 
the internal revenue commissioner. He maintained that 
though the tax on tobacco was primarily paid by the manu- 
facturer, it was, in fact, paid by the consumer, and it was well 
known that the retail sales, both before and after the passage 
of laws providing for a tax on manufactured tobacco, had been 
in small quantities. The existing tax was at the rate of one cent 
and a half per ounce, and the retail price five cents per ounce. 
It seemed incredible that a reduction of half a cent on the 
ounce in the tax would effect to any appreciable extent the 
retail prices charged on the quantity consumed. It was 
believed that persons who were in the habit of using manu- 
factured tobacco would not, because of the smaller tax, con- 
sume a larger quantity, and it was " not to be credited that 
persons who were not in the habit of using tobacco would be 
induced to commence its use in consequence of the reduction 
of the tax." The commissioner therefore concluded that a 
reduction of the tax would result in a corresponding reduction 
of the revenue. With respect to the second reason, an 
examination of the market quotations of tobacco for a period 
of years did not show that the tax on manufactured tobacco 
had had a depressing effect on the piarket price of leaf tobacco. 
Thebusinessof manufacturing tobacco had annually increased, 

' For effect of laws taxing tobacco, see speech of Mr. Winchester, May 21, 
1872, Cong. Globe, Appendix, p. 592. 



1884.] INTERNAL REVENUE. 441 

aud had spread throughout the country. There was a com- 
petition among them for the various choice grades of leaf 
tobacco, and this would not- be enhanced by a reduction of 
the rates of taxation on the manufactured article. The tax, 
however, was reduced, not with the expectation of stimulating 
consumption suiHcieutly to yield as much revenue as before, 
but in order to diminish it, as a reduction at that time was re- 
garded with favor. 

The mode of collecting the tax by the use of stamps was a 
marked improvement in preventing frauds. These were indeed 
practiced, but could not be so easily as before. The most 
serious evasions consisted in washing stamps after their 
oflficial cancellation, and in using them again. As the system 
of internal taxation diminished, it became more simple, frauds 
were less frequent, and the laws were more easily enforced. Of 
the entire internal revenue collected in 1866,' $50,128,079 were 
drawn from fermented and distilled liquors and tobacco; four 
years afterward $93,251,439 came from these sources, and 
$91,984,434 from income, including salaries, banks, matches, 
and other sources. In 1872, of the entire amount, $131,770,- 
946, the government obtained $91,470,184 from fermented 
and distilled liquors and tobacco. Since that time a constantly 
increasing proportion has been derived from the last mentioned 
sources. Supplying such a large portion of the internal 
revenue from the time of establishing the system, they have 
always occupied a large place in the operations of the internal 
revenue department of the government, and it was fitting to 
give a considerable space to them in our history. 

The reader, however, would have a one-sided notion of the 
operation of the internal revenue system if he inferred that 
' Whicli was ?310,906,984. 



442 FINANCIAL HISTORY OF THE UNITED STATES. [1881. 

the frauds and errors in administering the law were confined 
to distilled spirits and tobacco. The whiskey frauds were far 
worse than any other, but it must be remembered that the 
revenue from this source formed at all times a large j)ortion 
of the internal revenue. Yet the whiskey distillers were not 
the only sinners,and forgetters of the law. A\' rong doing and 
error have marked the conduct of all classes of internal tax 
payers in varying degree from the beginniug. In 1881, the 
commissioner discovered that a large number of banks and 
bankers had not made correct returns of their capital and 
deposits for taxation. These discoveries were first made in 
Chicago. In many instances a subsequent examination brought 
to light ouly small sums due to the government, and which 
were evidently errors in the calculations of the banks. In the 
case of certain foreign banks doing business in that city, large 
amounts of taxes were found due on capital brought into the 
country and employed in banking. The results of the examina- 
tion in Chicago led to an examination of the returns of banks 
and bankers in other cities. " It was found that while the 
returns of some banks had been accurate to the last cent, 
the returns of others had been made with deductions as to 
both capital and deposits, which were not admissible under 
the law." Many l)ankers readily submitted their books for 
examination, and showed a willingness to comply fully with 
the law. Others agreed to examine their books and make 
such statements as were required by the regulations established 
by the commissioner. Other bankers, questioning the right 
of internal officers to examine their books, refused either to 
produce them, or to answer interrogatories in regard to their 
liability for additional taxes. Against others the aid of the 
court was invoked to enforce compliance with the law. 



1881.] INTERNAL EEVENUE. 443 

The commissioner made two regulations at this time con- 
cerning the liability of banks and bankers which caused no 
little irritation. One regulation required the payment of a 
tax on the average gross amount of deposits. When the tax 
was first imposed, the question was immediately raised, What 
are the taxable deposits of a bank ? Were they the total 
amount of money received by it during a day's business, or the 
amount left over after paying all checks drawn against the de- 
posits during the same day ? The government, in 1865, ruled 
that taxable deposits were those which remained after checks 
payable during the same period of time had been deducted ; in 
other words, the balance or surplus which was free for the 
bank to use in making loans, and on which it could obtain a 
profit. This ruling, after application for sixteen years, was 
reversed by Commissioner Raum, and banks were declared 
to be liable for all the deposits remaining after the close of 
business, and checks drawn the same day against them, and 
settled at the clearing-house the day following, could not be 
deducted. 

The other ruling required private bankers to return as de- 
posits all money borrowed by them, to be repaid at a future 
day, with or without interest, whether secured by collateral or 
not, and also all sums left with them as margins on purchases 
of stocks, produce, cotton, etc., and that for purposes of taxa- 
tion, brokers who received money in this way were to be con- 
sidered bankers. This ruling excited much unfavorable dis- 
cussion. One newspaper reasoned in this way : "If brokers 
are to be considered as bankers because they received money 
from other people in the way of margins, they must be bankers 
for all other purposes, and must be also taxed on the money 
they borrow. Thus three or four taxes may be gotten out of 



444 FINANCIAL, HISTORY OP THE UNITED STATES. [1881. 

the same deposit. But if brokers are bankers, why are not 
bakers, and milk peddlers, and ice dealers, and all persons who 
receive money and issue tickets therefor? Is not a lunch- 
counter, if the proprietor receives deposits and issues certiii- 
cates redeemable in clams and oysters ? " ' 

With a repeal of the taxes the machinery for collection was 
rendered more simple, and fewer persons were employed. The 
supervisors and inspectors were among the first to be reduced 
in number and at length were omitted. In 1872 the office of 
assessor was abolished, and his work was done by direction of the 
commissioner. The internal revenue districts were consolidated 
into eighty, and the number of minor officers was diminished. 
Four years later another consolidation was made, and the col- 
lection districts were reduced to one hundred and thirty-one, 
and, in 1884, to eighty-five.^ The cost of collecting the revenue 
has been given with considerable detail from year to year in 
the reports of the commissioner, and has centred around three 
and a half per cent, which is only a small figure compared 
with the expectations of those who enacted the first internal 
revenue law.' 

' Boston Commercial Bulletin. See 36 Bank. Mag., p. 47. 

" Eeport of Com. of In. Eev., 1884. 

' "From the great extent of territory, and the almost numberless objects 
of taxation, it was variously estimated, during the pendency of the first 
internal revenue bill in the thirty-seventh Congress, that the charges of 
collection would be from seven to twelve per cent, and it was freely argued 
that the excise proper could not reach the treasury for less than fifteen or 
twenty per cent of its amount." — Commissioner Eollin's Annual Eeport, 
1867. 



1865.J TAXATION OF IMPORTS. 445 



CHAPTER VII. 

TAXATION OF IMPORTS. 

The war proved a wonderful fertilizer to American manu- 
factures, and they spread like a banyan tree. A few withered 
and perished from the effects of internal revenue taxation; 
some grew too rankly; but the principal industries struck 
deeply and securely into the soil. 

The duties were raised several times after the introduction 
of the internal revenue system, for two reasons : first, to 
protect the American manufacturer from the effects of internal 
taxation ; and, secondly, to obtain a larger revenue. The 
second reason, especially, for the advance, was too strong to be 
successfully opposed. Nevertheless, after the first year of the 
war, imports flowed into the country in enormous quantities. 
A large class had suddenly acquired much wealth ; the income 
of wage-workers and salaried persons had largely increased, 
and their demands, .united with the pre-existing demand, both 
public and private, strained the energies of the entire produc- 
ing world. If, therefore, the domestic producer rejoiced over 
quickened demands and large profits, the importer also rejoiced 
over his unaccustomed prosperity. An enormous capital was 
put into new enterprises, and many built, bought, and sold as 
though the war would last forever. The people were regarded 
by producers as a boundless sea, into which they could end- 
lessly pour their products without danger of ovei-flow. 



446 FINANCIAL HISTORY OF THE UNITED STATES. [186S. 

The war, therefore, was unquestionably a powerful stimu- 
lant to the manufacturer by creating a new and enormous 
demand for things. Here and there was a person sober 
enough to perceive that the government and the people were 
getting unexampled means wherewith to make purchases by 
putting a lien on the wealth of the country and on future 
earnings which they would be obliged to discharge, and from 
which they would gravely suffer if they did not. If the 
people discharged that lien, they would have less to the 
extent of the amount paid ; if they repudiated it, the lenders 
would suffer to a similar extent. A large portion of the 
wealth consumed in war time was created during those four 
years, beside a surplus; consequently, the account does not 
look so appalling when viewed from all sides as from only 
one. Yet the stimulant was unnatural, and could not be long 
applied, and, when A\'ithdrawn, the excitement and anxiety 
concerning the result of the national struggle were succeeded 
by an anxiety concerning the future of business which, first 
appearing among the manufacturers and other employers of 
labor, soon extended to all classes, and continued, in varying 
degree, until the restoration of specie payments. 

Beside the quickly vanishing demand of the government at 
the close of the war, the rapid decline in the value of gold 
was the first marked adverse influence to the manufacturing 
interests. The protective effects of the gold premium on 
manufacturing cannot be easily ascertained, because the prices 
of commodities did not respond to the advance in gold with 
much regularity. Imported commodities were influenced more 
strongly by the gold premium than others, yet even in these 
this influence declined as they wandered farther and farther 
away from the importer. He played tricks, too, with the 



1865.] TAXATION OF IMPORTS. 447 

premium, by adding an additional sum to the price of his 
goods to insure himself against loss by variations in gold. 
When the premium exceeded the advance in labor and raw 
material, and other expenses of manufacture, tlie effect M'as 
favorable to the American manufacturer ; -when the premium 
was below the advance in these things, the effect was unfavor- 
able to him. Putting the fact another way, when paper money 
drove up the price of gold higher than the price of other 
things, it acted as a barrier against importations ; when the 
price of gold did not correspond to the advance in otlier 
things, the manufacturer was unfavorably affected so far as 
purchases were determined by the difference between the 
prices of foreign and domestic products. It must be remem- 
bered, however, that during the last three years of the war, 
when money was abundant, purchases were not always based on 
the principle of getting the most for the least money. Many 
felt very happy over their suddenly made fortunes and larger 
salaries and wages, and they were quite indifferent about the 
prices they paid. Some preferred foreign goods because they 
were foreign ; others because they believed them to be better. 
Some preferred a large price to a lower one, getting more 
pleasure in the use and possession of the purchases than they 
would had they paid less. Moreover, while the speculation in 
gold was continued at a great height, importers could charge 
more for their goods, to insure themselves against loss from 
fluctuations in the price of that metal, without lessening their 
sales, so long as money was abundant, and the demand brisk. 
When sales began to flatten, then importers figured more 
closely, and the American producer was no longer helped by 
this adventitious circumstance. He now learned his first 
sharp lesson of the disadvantage of inflation. If prices in 



448 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 

general had risen enormously the premium on gold had 
sometimes gone even higher ; when this suddenly declined, 
without a corresponding decline in the prices of other things, 
the importer was able to put his goods on the market at a 
lower price than before, and to the extent of the difference 
between their price measured by the gold standard and do- 
mestic goods of the same kind measured by the paper standard, 
he secured an advantage by the drop in the gold premium. 

The first class to learn of the new order of things were the 
makers of war materials. Some of them had begun to learn 
before the surrender at Appomattox, for their contracts had 
been fulfilled and they could get no more. Others had con- 
tracts that would run for several months longer. In a few 
months at the longest, the war harvest was over and their 
summer was ended. They had made a great deal of costly 
machinery, and their first thought was to look abroad for 
contracts. In a few cases these were obtained ; in most, the 
mills were closed ; some of them went into bankruptcy, and 
nearly all of this class of accounts showed a balance on the 
wrong side. 

The woolen manufacturers were the next to realize the 
change. The government had been an enormous purchaser ; 
besides, the dearness of cotton had led to the substitution of 
wool to some extent. With the return of peace, came a fresh 
supply of cotton, the people enlarged their uses of it, and the 
demand for woolen goods speedily fell away. To guard 
against disaster, a convention of wool growers and manufac- 
turers was held at Syracuse, in New York, in December, 1865. 
The object was to recommend higher rates on wool and woolen 
products, and, if possible, to get them adopted by Congress. 
In the joint report of both the producers and manufacturers 



1865.] TAXATION OF IMPORTS. 449 

to the United States Revenue Commission, it was declared that 
the object of the :Morrill tariff of 1861, and the tariff of 1864, 
was to give sufficient protection to the wool grower, and to 
put the manufacturer in the same position as he would occupy 
if his wool were free of duty. A duty supposed to be suffi- 
cient to protect the wool growers was put on wools competing 
^\•ith his own, and on woolen cloths supposed to be sufficient 
to reimburse the manufacturer for the amount of the duty 
paid on the wool. An ad valorem duty on the cloths was 
added to reimburse the expenses to the manufacturer of carry- 
ing the internal taxes, the duties on the wool, drugs, and other 
materials used in manufacture, and to furnish the required 
protection. Both classes, recognizing fully the correctness of 
the principle on which the tariff law ^ was based, declared that 
the minimum rate of duty actually paid on the class of wools 
most directly competing with our own had been less than five 
cents per pound instead of six, as intended by the law. They 
therefore recommended that a provision be inserted in the 
tariff law, requiring all the fine wools to be subjected to a 
duty of not less than ten cents per pound and ten per cent 
ad valorem, and that manufactures composed wholly or in 
part of wool or worsted should be subjected to a duty equal to 
twenty-five per cent after reimbursing the amount paid on 

'■ " It was not devised to cover up the duty, or to conceal its magnitude, 
but as the best and only practicable means to give a duty compensatory of 
that on wool, — a duty which could be easily made specific, because the 
terms upon which it was based were fixed and well known, — and to give a 
further protective duty to the manufacturer, which, in consequence of the 
infinite variety and varying prifcs of the goods, making purely specific 
duti&s impossible, must necessarily be ad valorem." Extract from remarks 
of Mr. Hayes on the System of Compound Duties before the Tariff Com- 
mission. 12 Bulletin of Association of Wool Maniif., p. 435. 

29 



450 FINANCIAL HISTOEY OF THE UNITED STATES. [1867. 

account of duties on wool, dye-stuffs, and other imported 
materials used in such manufactures, including all internal 
revenue taxes. 

The wool growers and manufacturers had learned from 
former experience that neither class could expect to thrive at 
the loss of the other ; so the matter of adjustments was left to 
a joint executive committee, who made the recommendations 
mentioned. Henry S. Randall, R. M. Montgomery, and 
three others represented the wool growers, and E. S. Bigelow, 
T. S. Faxton, Edward Harris, and four more, the manufac- 
turers. The tariff schedule, which ^vas the final outcome of 
this convention, was incorporated into the tariff bill recom- 
mended by the revenue commission, and which failed to pass. 
Shortly afteru'ard it M'as separated from the general bill, in- 
troduced, and became a law.' 

Wool was divided into three classes — carpet, clothing, and 
combing wool. The duty on the first class was fixed at three 
cents a pound, if costing twelve cents, or less, and doubled, if 
costing more than that figure. As this class of wool was not 
much grown in our country at that time, the duty was put at a 
comparatively low rate. On other classes were to be paid, if 
costing thirty-two cents a pound, or less, a duty of ten cents 
per pound, and eleven per cent ad valorem, and, if costing 
more than thirty-two cents, twelve cents per pound, and ten 
per cent ad valorem. 

These rates did not appear to be much higher than the old 
ones, but by re-arranging the classification, a large amount of 
wool was subjected to a heavier rate than before. This led some 
manufacturers to complain of the tariff, notably Edward Harris, 
one of the most prominent woolen manufacturers in the country. 
' Act, March 2, 1867, 39 Cong., second session, chap. 197. 



1867.] TAXATION OF IMPORTS. 451 

On woolen goods a compound duty was levied, composed of 
three parts : first, fifty cents a pound to reimburse the duties 
paid on wool, dye-stuffs, and charges for carrying the duty ; 
twenty-five per cent ad valorem, which was intended for pro- 
tection ; and ten per cent more, which was to off-set the internal 
revenue tax. On carpets, and dress goods for women and chil- 
dren, the specific duty was levied on the square yard instead 
of the pound, but the mode of ascertaining it was the same. 

Thus the woolen manufacturers who were in greater danger 
than any large manufacturing class, at the close of the war, 
had strengthened themselves somewhat against foreign com- 
petition. The cotton manufacturers stood on more secure 
ground, while the iron manufacturers could hopefully look to 
the building of railroads which had been neglected during the 
war for the employment of their plant. 

AYith the reduction of the internal revenue taxes many 
expected a corresponding paring down of duties on imports. 
In 1867, a bill was introduced, prepared by David A. Wells, 
at the request of the secretary of the treasury, reducing the 
duties on raw materials, and, to some extent, those on manu- 
factured articles. A careful re-arrangement was made of the 
rates on spices, chemicals, dyes, and dye-woods. A great deal 
of labor was spent on the bill, the two-fold design of which 
was to reduce the duties somewhat, and to make a simpler and 
more intelligent classification. It was passed by the Senate, by 
a vote of twenty-seven to ten, as an amendment to a bill which 
had passed the House, and, afterward, by a majority of the 
House, but not getting a majority of two-thirds, did not 
become a law. 

Although bills for reducing the tariff were introduced at 
every session, and the old arguments after a little furbishing 



452 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

were repeated, nothing was done. If higher duties were im- 
posed to get a larger revenue, and also to secure the American 
manufacturer against the effects of internal taxation, and the 
former thing was no longer desired, and the internal taxes 
had been reduced or repealed, why were not the duties revised 
and lessened? Because competition was so sharp among 
American manufacturers that no good was likely to be gained 
by reducing them. The consumer had no reason to expect 
lower prices if this were done. While prices were maintained, 
and even advanced on some things, until the depression of 
1873, on most the trend was downward, and so there was not 
that keen interest in the subject that would have existed had 
manufacturers used the tariff to enrich themselves at the public 
loss. Nearly the whole period after the close of the war was 
a trying one with them to maintain their ground. There 
were special industries, it is true, which were very profitable, 
but the period of sudden fortunes had passed away. The 
people knew this, and most of them were content. Rarely 
did they petition Congress for a reduction of the tariff, or 
complain through the newspapers.* The .subject occupied 
only a small place in party platforms, particularly in those of 
the Republican part}', and agitation was mainly confined to 
college professors who taught political economy, and the daily 
newspaper writer, who, when times were dull, and exciting 
themes few, could always fall back on this subject for a column 
with a kind of hardened serenity, that, if not presenting the 
faintest new gleam of truth, he was, at least, doing his duty 
in keeping the lamp trimmed and burning for persons of 
imperfect sight. 

' Petitions for a reduction of duties were singularly few until 1872. See 
House and Senate Mis. Docs. 



ism.] TAXATION OP IMPORTS. 453 

In 1870' the duties on tea, coffee, wines, sugar, molasses, 
and spices were lessened. A reduction was made on pig iron 
from nine to seven dollars a ton, which was similar to the in- 
ternal tax that had been repealed four years before. Some 
articles were put on the free list. On the other hand, the 
duty on marble -was advanced, and also on steel rails to twenty- 
eight dollars per ton. 

There was one person at this time, Mr. David A. Wells, 
who tried to show that the tariff should be reduced not only 
for the benefit of the people, but for the special benefit of 
the manufacturers themselves. He was special commissioner 
of revenue, and, as a consequence of his official position and 
the numerous and interesting facts gathered by him, the de- 
ductions in his four annual reports received wide attention. 
He was impressed with two facts : first, that the wealth of the 
country had had a seemingly fabulous development ; and, sec- 
ondly, that it was very unequally divided. He was unpleas- 
antly surprised to learn that while the rich were becoming 
richer, the poor were becoming poorer. This state of things 
had long existed in the Old World, and particularly in Great 
Britain, where wealth had increased faster than in any other 
European country, but the correctness of the application of that 
phrase — which had been correctly applied elsewhere — to the 
industrial condition of the United States was widely questioned. 
No statement of the kind had ever been made before which 
caased a shock so cold and unwelcome. 

The conclusion was of profound importance, especially in a 
country having no recognized non-employed class, and where 
the claims and interests of labor and of the poor from the 
first have been so kindly regarded. 

' Act, July 14, 41 Cong., second session, chap. 255. 



454 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

Mr. Wells referred "the inequality in the distribution of 
our annual product ... in no small degree ... to artificial 
causes," namely, an inconvertible paper money, and the influ- 
ence of taxation, direct and indirect, on the cost of domestic 
production, and consequently on the ability of the country 
to exchange with foreign nations on terms of equality.^ 

That many persons within a short period had become rich, 
and that many who were rich in the same period had become 
richer, could not be denied ; but, was the assertion true that 
the poor had grown poorer ? The assertion thus put forth in 
his third report was amplified and more fully explained in his 
fourth and last, and in that did not appear so harsh or ques- 
tionable. Nevertheless, it kindled a fierce controversy. He 
presented some evidence which showed that more persons 
lived in a house in Massachusetts in 1868 than in 1861 ; that 
the average domestic consumption of cotton, woolen goods, 
boots and shoes, coal and lumber, had not been maintained ; 
that the advance in the salaries or income of clergymen, teach- 
ers, and other professional men, as a general rule, had advanced 
since 1861, but not as much as the prices of commodities ; and 
that the returns of the savings banks, though much larger 
than formerly, furnished no disproof of his assertion when 
properly explained. If the natural areas of plants be a highly 
complicated subject to determine, the causes of the unequal 
distribution of wealth were hardly less so, and, after a very 
brief investigation, to conclude that the existing distribution 

' Fourth Eeport, p. 39. This Beport was examined and severely criti- 
cized by the majority of the Committee on Manufactures. They say, "The 
fact is potent to all, that the general prosperity of the people during the 
past ten years, notwithstanding the drain of a great war, has been most 
marvellous and wholly unprecedented." 



IS'TO.] TAXATION OF IMPOETS. 455 

could be explained by the operation of two causes, taxation and 
an irredeemable paper currency, should cause as much skepti- 
cism concerning its truth as would the announcement after an 
equally hasty investigation of the plant life of the globe, that 
it is caused wholly by the chemical power of the solar rays. 

"With every successive report, Mr. Wells increased the stress 
of his argument that, in the producing and distributing of 
wealth all classes of persons were taxed for the benefit of 
the manufacturer. After showing, in his final report, how 
the gains of the producers had been transferred in several 
stages of society to the non-producing classes, he says, " We 
come now to the fourth stage of society, where the grosser 
methods of transferring property diminish and cunning comes 
in to take their place. This is the stage we now occupy. 
We have advanced no further, and have yet no laws to pre- 
vent transfers of property by cunning, artifice, and trickery. 
The unproductives are still animated by their ancient spirit, 
and being the chief makers of the laws and institutions for 
the protection of labor and ingenuity, the increase of products 
and the exchange and transfer of property, they shape all their 
devices so cunningly, aad work them so cleverly, that they, 
the non-producers, continue to grow rich faster than the pro- 
ducers. Whoever at this day watches the subject and course of 
liquidation, and appreciates the spirit of the laws, cannot fail 
to perceive how more and more the idea of transfer of the 
surplus product of society, and the creation of facilities for it, 
available to the cunning aud quick as against the dull and slow, 
has come to pervade the -whole fabric of that which we call 
government ; and how large a number of the most progressive 
minds of the nation have been led to accept as a fundamental 
truth in political doctrine, that the best way to take care of 



456 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

the many is to commence by taking care of the few ; that all 
which is necessary to secure the well-being of the workman 
is to provide a satisfactory rate of profit for his employer." ' 
Then he puts underneath this statement a singularly thin 
layer of facts. The glaring defect in !Mr. Wells's exposition 
of the unequal distribution of wealth is its incompleteness.^ 
Having found two causes for it, taxation and an inconvertible 
paper currency, he stops, thereby creating the impression that 
he had gone to the bottom of the subject. This ^vas a grave 
error. No doubt the tariff had contributed, to some degree, 
in causing inequalities in the distribution of wealth ; and the 
paper money, during the period of the readjustment of prices, 
many more. Had the tariff accomplished only this, to tax the 
many for the benefit of the few, it would not have lived long. 
Mr. Wells, however, left wholly out of sight other persons, 
beside manufacturers, who acquire and retain wealth, and, by 
doing so, wrongly interpreted the facts of our recent indus- 
trial history. 

It Mill suffice our purpose to divide wealthy persons into 
the following classes : (1) those who possess inherited wealth ; 
(2) or have gained it principally by accident, like miners 
and the owners of land that has risen largely in value ; (3) 
or have acquired fortunes in trade ; (4) or have acquired it 
through the assistance afforded by tax or patent laws ; (5) or 
have acquired illegal fortunes through unlawful speculation, 
stock watering, abuse of trusts, the perversion of corporate 
interests for private gain, and the like. Of the enormous 
fortunes, many of them belong to the fifth class ; while those 

1 Fourth Report, p. 39. 

^ Examination of Statements in the Eeport of Special Com. of Revenue, 
House Report, No. 72, 41 Cong., second session. 



1870.] TAXATION OF IMPORTS. 457 

of the third class are very numerous. Those of the fourth 
class, which include the manufacturers, are doubtless neither 
so numerous nor so large as others. If these facts be 
correct, why did Mr. Wells single out the manufacturers and 
hold them up to the condemnation of the world as the 
" cunning " getters of wealth through the operation of law ? 
Why did he leave wholly out of sight those who had accumu- 
lated vastly more, and whose operations had been far more 
wide-spread and gigantic in causing that unequal distribution 
of wealth of which he complained ? Was his mind so com- 
pletely filled with the doings of the manufacturers as to shut 
out wholly the conduct of the speculators, the railroad kings, 
the great trading princes, the fortunate gold and silver miners, 
the finders of oil, and that large unnamed number who had 
acquired fortunes in a thousand ways outside the operation of 
tax or patent laws? One would suppose from reading his 
reports that if the manufacturers had not acquired their wealth, 
he would not have been confronted with the great problem of 
the unequal distribution of wealth. This certainly would 
have been a mistake of the first magnitude ; for, if the manu- 
facturers had not existed, the other holders of wealth were in 
the land, and while the inequality would not have been quite 
as great with the disappearance of any class of wealthy men, 
yet the absence of the wealth accumulated by manufacturers 
would have reduced that inequality less than the absence of 
the wealth of almost any other class. 

The question may be asked. If the tax laws were the 
admitted cause of this inequality to some extent, why not 
abolish or modify them so as to prevent it ? An explanation 
is needful before answering the question. Admitting that the 
tariff has been the cause of an excessive accumulation of wealth 



458 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

in some cases, sucli has not been the effect with every person 
who, under the protection thus granted, has engaged in manu- 
facturing. The entire shore of manufacturing enterprise is 
thicltly strewn with industrial wreclis. More enterprises 
have succeeded in the last twenty-five years than in any other 
period of equal length ; but whoever estimates the profits of 
manufacturers by short periods is sure to reach a wrong con- 
elusion. If their profits are great at some seasons, their losses 
are, perhaps, as great, or greater, at others. Mr. Wells himself, 
in one of his reports, very accurately depicts the course of pros- 
perity and decadence through which they have often gone. 
A proper estimation of their wealth must extend over a long 
period ; and, thus regarded, the manufacturers who can be 
singled out as having taken advantage of the tariff laws to 
acquire enormous private gains are few. It will be admitted 
that there are many who possess a fair amount of wealth, but 
surely they are not to be condemned when they have made 
it legally, nor is the system necessarily under which they have 
made it, nor the government under whose protection it is 
retained. Those who are industrious and sagacious, and 
who do more through natural or properly acquired endow- 
ments than others to create wealth, ought to be permitted to 
retain it. Society does not rebel at this proposition. Society 
rebels over the enormous fortunes, the great landed estates, 
the using of the government for individual gain by the loss of 
a larger number. We should not overlook the fact that 
many of the fortunes of manufacturers are founded on the 
protection afforded by the patent laws. This is especially true 
of many of the wealthiest. The successful manufacturers of 
textile fabrics have perhaps been less aided in this way than 
any other large class of manufacturers. Their productsj have 



1870.] TAXATION OF IMPORTS. 459 

not possessed enough novelty to secure the protection granted 
by the patent law. JNIany kinds of metallic products, how- 
ever, and those of wcod, paper, rubber, etc., have had such 
protection. After the baser elements have been separated 
from iron, copper, lead, and other ores they have entered 
very generally into the composition of patented articles. The 
word patent is seen on a very large number of the articles we 
buy. It is seen on nearly all agricultural implements, on 
numerous kinds of hardware, on almost all kinds of machinery. 
It is quite impossible to distinguish between the protection 
thus granted and that by the tariff with respect to profits. 
The profits of steel rail manufacturers, which for a short 
period were large, accrued chiefly from the protection granted 
by their patent. Had none existed, others would have rushed 
into the business, and the profits would have quickly melted 
away. To the manufacturers whose success depended chiefly 
on the protection of the patent law, the tariff has operated to 
diminish their gains, by increasing the cost of things used by 
them in their particular manufacture. In such cases, the 
tariff has acted as an equalizer instead of a protector tu the 
manufacturer. Keeping these limitations in mind, the tariff 
has not been often used, compared with its general and long- 
continued use, to acquire those great fortunes which are re- 
garded by society with much solicitude. 

Eeturning now to the question why should not the tariff 
have been so modified as to prevent, if possible, the accumu- 
lation of great fortunes when such effects were discovered, 
we answer, it certainly should have been. These are, however, 
merely blotches on the picture, and not the picture itself 
Before pointing them out, a further answer must be made to 
give completeness to the above inquiry. 



4G0 FIN^USrCIAL HISTORY OP THE UNITED STATES. [1870. 

If our system of taxation had been so radically changed 
that persons could no longer have accumulated fortunes under 
the smile and protection of the government, would the unequal 
distribution of wealth have been stopped? Certainly not, 
but transferred to manufacturers on the other side of the sea.. 
They would have reaped the profits, and the American people, 
in the aggregate, would have been much poorer than they are. 
The relative inequality of wealth would have been less ; the 
poor would have been equally poor, and probably poorer, and 
the rich manufacturers Avould have been unknown. Mr. 
Wells's argument is saturated with the idea that the wealth of 
the manufacturer was extracted from the people; that they were 
poorer to that extent, when, in truth, the wealth of the manu- 
facturers was an additional creation, and which, if not created 
by them, would have been created by manufacturers in other 
countries. If prices had been lower, with no protective laws, 
then the foreign manufacturer would have made less, and the 
consumer would have had more, assuming, of course, the pro- 
duction of the same quantity in either case. What reason, 
though, have M-e to suppose that the prices would have been 
lower ? Is not the foreign manufacturer intent in getting all 
he can ? And if the American consumer could pay it to the 
American manufacturer, why could he not pay it to the foreign 
one ? and, if he could, what reason have we for supposing the 
foreij^n manufacturer would have asked less? Would he have 
applied a higher code of ethics in dealing with the American con- 
sumer thau the American manufacturer has applied? Would 
he have regarded America as a land wherein to exercise charity 
by remitting a portion of his gaius? Whatever eagerness 
the American manufacturer may have shown in improving 
his condition, foreign manufacturers, at all times, have exer- 



1870.] TAXATION OF IMPORTS. 461 

eised as mucli diligence and unscrupulousuess. They, certainly, 
are not superior in moral virtues, in cliarity, nor are they 
less zealous in money getting. It is assumed by those main- 
taining the opposite view that competition would have regu- 
lated the matter, but competition between producers in thel; 
same country for a foreign market is a very diiferent thing 
from competition in a country where both consumers and pro- 
ducers live. ^Moreover, competition is, by no means, the final 
law of trade in any country, or between countries. 

Persons generally pursue the policy, which, immediately or 
prospectively, will be the most profitable ; if this be competi- 
tion, they will compete ; if combination, they will combine ; 
and often, when competing, the object is to destroy the weaker 
competitors in order to make combination possible. 

What would have happened if protection had not been 
adopted is the battle-ground between the two sides to the con- 
troversy. Briefly stated, the protectionist maintains that the 
consumer, under the protective system, though paying higher 
prices in the beginning, is now paying for many things much 
lower ones than if he had not been supplied at home, beside 
gaining other most desirable advantages. The free-trader, on 
the other hand, maintains that prices would have been lower 
in the beginning, with an equally strong assurance of their 
remaining so, if the government had not interfered. 

Thus viewing the question, how is an absolute answer 
possible ? / The question is one of conductT^ Mr. Wells 
showed- particularly that when the protection to woolen 
manufacturers was so large that tempting profits were ex- 
pected, new factories were built, production was enlarged, and 
prices fell to a low point. The excessive profits made in the 
beginning were lost in the end, so that the unequal distribu- 



462 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

tion of wealth among them did not last long. He showed 
very truly that these elevations and depressions are not good 
for society, but they have always happened, and are not di- 
minishing in number nor intensity. ISTor are they confined 
to our country, but pervade everywhere. They seem to be 
the inevitable accompaniment of our modern industrial civili- 
zation. In railroad building, which is not protected in the 
least by the State, but free as the Mississippi, the most gigan- 
tic over-production has taken place, succeeded by costly de- 
pressions. With respect to those caused by the tariff, they are 
not so numerous nor prolonged as formerly, like the narrower 
arc of the winter's sun. It must be remembered, too, that 
these times of depression are mighty levelers of the world's 
wealth. Regarding our protected industries during long periods 
of time, and keeping clearly in view the depressions they have 
encountered, the dispersion of the large gains in unprosperous 
times, the balance left to the manufacturer has not been large. 
Society probably would have been better off had these gains 
been more equal. Can it be shown, however, that American 
society would have been better off without these gains, and 
would they have been acquired without a protective system? 
Finally, it may be inquired, if the poor became poorer, was 
not the fault in many cases their own ? If they did not put 
so much money into the savings banks, was not the reason be- 
cause they chose to spend more. Why have so many manu- 
facturers risen above their fellows ? Not because they started 
above them in the race, but were more industrious and saving. 
The condition of the workingmen compared with the condition 
of those in other countries is far better in many regards^ yet 
could be greatly improved by a wiser use of what they have. 
Because they have not made the best use of their means should 



1870.] TAXATION OF IMPORTS. 463 

not be charged to the tariff any more than to the absence of the 
Rocky [Mountains along the Atlantic. If they did not save in 
many cases, their surplus, after supplying necessary wants, 
what reason have we to suppose they would have saved their 
surplus had it been larger ? 

The discussion of the tariff would have been narrowed and 
brought nearer to a point if several considerations had been 
regarded and admitted. First, that the producers who have 
sought to establish and maintain a tariff have done so prima- 
rily to make money for themselves; second, that those en- 
gaged in business who have ojDposed a tariff have done so be- 
cause the opposite policy would be more profitable to them- 
selves ; third, that protection in the beginning meant higher 
prices to some extent, and that the more widely protection was 
extended, the higher must be the prices or the less must be the 
protection. When all interests are protected, the advance is so 
great as to jeopardize all ; when protection has stopped mid- 
way, dissatisfaction has sprung from the real or seeming im- 
partiality. Too often certain protected interests have hesitated 
to accord the protection desired by others, well knowing that 
to do this would put their own business in jeopardy. The 
wool tariff of 1867 did raise the rates on fine wool to such an 
extent as to undermine the profit of the woolen manufacturers 
using fine wools, and led Edward Harris, one of the most 
prominent and successful among them, to conclude that he 
would be better off without any tariff on wool or his manu- 
factures than he was under the existing system. He was 
strack by many a thunderbolt of criticism, yet we know no 
reason why a man should be condemned for exercising wisdom 
in his OTSTL generation. 

Eliminating these elements, the subject is somewhat sim- 



464 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

plified, and it may, we think, be correctly said that the manu- 
facturer at all times has desired primarily the establishing and 
maintaining of protective laws in order to make money, not 
necessarily a great fortune, yet enough to justify the risk 
undertaken, while the question for Congress has been to ^yhat 
extent could such laws be made in the interests of the people. 
The free-trader has maintained that the profits of the manu- 
facturer were a " tax," and which ought not to be levied, and 
that in exchanging both parties gain, otherwise they would 
not exchange. In every exchange both persons are gainers, 
yet it is of the utmost consequence to human happiness and 
welfare who gains the most. Although the man who gives 
five dollars for a bread-fruit to keep himself from starving is 
the gainer by the exchange, he does not gain so much as the 
mau who pays five cents for one ; and if each has a hundred 
dollars and can buy only bread fruit, the ouewill have a much 
better chance to continue his earthly existence than the other. 
If the American people had concluded to depend on the 
unselfishness of the foreign manufacturer, the strong prob- 
ability is that our gain would not have been great enough to 
leave a surplus wherewith, if we chose, we could erect manu- 
factures to compete with him. The example of Turkey is 
the more probable, where the British manufacturer has i;ained 
everything, and the Turks have nothing left. The Turks 
were gaining all the while, of course ; otherwise they would 
not have exchanged. Yet paradoxical as the remark may 
be, the more they exchanged the poorer they became. 

The test by which protection generally has been tried is 
that of price. If protection increased prices, it was to be con- 
demned ; if likely to reduce them in the end, protectionists 
have justified the action of the State. The soundness of this 



1870-] TAXATION OF IMPOETS. 465 

test may be questioned. The Old World had a surplus of 

capital and population, and the United States an abundance 

of land and other natural agents ; and if, as a consequence of 

introducing the protective system, laborers have been attracted 

to this country more rapidly than they would otherwise have 

come, and their condition has been improved by coming, then 

protection is justified with respect to them. That the laborers 

are better off is proved conclusively by the fact that they are 

coming in ever-increasing numbers. Why do the poor of 

Great Britain and other countries flee to the United States 

if, as a consequence of so doing, they become poorer? 

Xevertheless, the wave of immigration is constantly rolling 

higher and shows no signs of subsiding. The fact is, their 

condition is immensely improved, and every new-comer^ M'hen 

fairly settled, begs his friends on the other side to follow. 

On this class surely the arguments of the free-trader have 

fallen as lightly as the snows on the mountain tops. This 

long-continued migratory movement toward our shore is the 

grandest transformation scene the world has ever beheld. 

Moreover, the prices at which producers sell and at which 

consumers buy are often far apart. In the purchase and sale 

of products by the middleman, he has looked as sharply after 

his profits as the manufacturer has after his own. The 

middleman has not intentionally missed an opportunity to 

swell his gains. The prices of manufacturers have been 

lessened on many an occasion without lessening those paid 

by the consumer. Surely the tariff is not the cause of this 

condition of things. During times of depression, especially, 

when prices are falling, the reductions of middlemen very 

generally do not correspond to those obtained by themselves. 

One reason may be that their losses are heavier from creditor 

30 



466 FINANCIAL, HISTORY OF THE UNITED STATES. [1870. 

purchasers, and it is necessary to stick more closely to the old 
prices to escape bankruptcy. Whatever the causes for their 
conduct may be, the fact is unanswerable, and should not be 
omitted in tracing the effects of tariff legislation. 

Had dependence on Europe been the established policy, we 
should not have developed our great mineral resources ; we 
should not have had many railroads, nor accumulated much 
wealth, nor would the settlement of the country probably 
have gone fa;r beyond the Alleghenies. /Whether the mil- 
lions of foreigners settled throughout this country to-day are 
in a better condition than they would be if living in the 
over-crowded countries of Europe, it seems to us is the true 
test to apply to them to determine whether the existing policy 
is justified ;\nd with regard to the Americans, while their 
condition would have been very different, possessing not much 
wealth, and yet having other compensations, the belief cer- 
tainly is very general that they, too, are better off than they 
would have been had the other policy prevailed. 

The tariff, in truth, is not a tax, but a loan made by those 
having more to the less favored, and on which the lenders 
have received generous dividends ^ which will be largely 
increased in the future. This is no deduction of fancy. Two 
solid facts support- the statement; first, the growth of our 
manufactures is incontestable proof of the mode of employ- 
ing the loan, and the low prices equally conclusive proof tliat 
it has been returned with generous interest. 

It has been said that the lower prices would have come 
any way, tliat they are due to inveution, and the like. What 
was the incentive for exercising the inventive genius, for 

' Concerning the reduction in prices, see Eep. Haskell's Speech, 14 
Cong. Becord, p. 1686. 



1870.] TAXATION OF IMPORTS. 467 

cheapening products, and for building factories ? The protec- 
tion held out bv the government. We admit that it has 
often proved delusive, and costly ; that many have suffered, 
and their hopes have turned into ashes ; nevertheless, their 
faith to do and dare has been rooted in governmental action. 
"Why are no tin manufactures existing ? Because of a lack of 
sufficient protection. We do not ask the question for the 
purpose of showing what has been or ought to be done, but 
simply as a preface to the remark, that if a tariif should ever 
be granted sufficient to induce persons to erect factories, and 
acquire the necessary skill to produce, they would not stop, 
unless a reversal of governmental policy should be so complete 
as to shut out all hope of future success. This has been 
the history and influence of the tariff in the past. At all 
times it has been a powerful incentive to act, and in periods 
of discouragement has stimulated the exercise of the highest 
genius in invention, and in labor-saving, to prevent shipwreck. 
From all this toil, loss, and pain have arisen the most 
splendid industrial success the world has yet seen. 

If the success of the protective policy, thus broadly regarded, 
justifies the experiment, it must be remembered that at all 
times it has been attended with evils, the effects of which 
would have been far worse had not persons been alert in 
exposing them and devising remedies. Again and again has 
protection been unwisely granted. The conflict among the 
interests protected is proof enough of this statement. Every 
tariff has been a compromise, and something of a bungle, in 
consequence of the contention of opposing interests. If, after 
hearing all parties interested in desiring protection. Congress 
had acted solely for the general welfare, the result would have 
been very different from that recorded on the statute book. 



468 FINANCIAL HISTORY OF THE UNITED STATES. [1873. 

To show the defects in the tariff laws would be a long, 
if not tedious, task. Only some of the grosser defects can be 
noticed. One of these was the duty on steel rails in 1872. 
The duty itself was well enough, if the patent under which 
they could be made in this country had been free, so that com- 
petition might have existed at home. The principle has 
always been maintained, that if the American manufacturer 
were protected from foreign competition, the price, if so high 
as to yield large profits, would be corrected by home com- 
petition. To put up a high protective wall against outside 
competition, and then permit a few concerns to control the pro- 
duction at home, was a procedure for which there was no 
defence. If, in 1883, Congress went too far in reducing the 
tariff on rails, the manufacturers learned that the reason which 
animated more than one Congressman was to correct the 
blunder of 1872. Society is very slow in correcting social 
wrongs, and the longer the delay, as in the French revolution, 
the more terrible and irrational is the punishment. "What 
Congress ought to have done, after fixing theiariff at twenty- 
eight dollars per ton, was to require the steel manufacturers 
to throw the patent "Open for free manufacture, and then the 
evil would not have arisen. Happily, no evil of that kind 
long exists in this country, for either the good sense of those 
profiting by it will return, and they will be content with 
smaller gains, or else their cuj)idity, like the fish in the sea, 
■ndll cause a carnage among themselves. They extended 
the patents to other companies. The year after the law was 
enacted business was panic-stricken, became permanently 
depressed, the companies increased their output, and from 
the operation of these, and other causes, the aggregate profits 
in steel-rail making have not been excessive. Thus, the 



I860-} TAXATION OF IMPORTS. 469 

wrong inflicted in the beginning has, in great part, been 
corrected. 

Another wrong was the change in the tariff on copper in 
1869.^ Before that time the duty on copper ore had been five 
per cent, and on copper in bars and ingots, two and a half 
cents per pound. Copper ore was imported from Chili, 
smelted and refined in Baltimore. Just before the enactment 
of this law, the copper mines of Northern ]\Iichigan began to 
yield largely, and the advance was granted to protect them. 
When conglomerate copper rock was discovered in Northern 
i\Iichigan of surpassing richness, the Calumet and Hecla Min- 
ing Company was organized, which produced cojjpcr at very 
low cost. It could mine copper, and sell it at a handsome 
profit, without any protection whatever. It could, in truth, 
produce copper more cheaply than any mine in the world. It 
was maintained that the tariff ought to remain, in order that 
the less favored companies might survive and make money; 
this, though, is a dangerous principle to apply. It was not 
regarded when the Baltimore and Boston smelting establish- 
ments were sacrificed for the copper-mining companies of 
Lake Superior, and why, in turn, should these have been 
saved when a richer vein liad been discovered from which an 
abundant supply could be obtained ? It may be said, that the 
smelting works sacrificed were small affairs compared with all 
the copper mines, except the Calumet and Hecla, yet such a 
principle is dangerous to apply in any case. Whenever 
nature yields an advantage to one, whereby he can sell at a 
lower rate than another, the State should not take cognizance 
of the event to neutralize the effect; for if it did, assistance 
would undoubtedly be asked to sustain the less fortunate 
' Act, Feb. 24, 1869, 40 Cong., third session, chap. 45. 



470 FINANCIAL HISTOEY OF THE UNITED STATES. [1869. 

against others. The pig-iroa makers having the old furnaces 
might, for the same reason, ask protection against the Isabella, 
which turns out one thousand tons per week, four times as 
much as the other. When, therefore, conglomerate copper ore 
was discovered, of abundant quantity, and the tariff was no 
longer needed to protect that industry, — for the company could, 
and did, profitably export copper, — the tariiF should have 
been amended or repealed.^ 

Moreover, it is true that the principle of protection has 
been applied too widely to make it the most effective. "When 
Great Britain determined to become a great manufacturing 
nation, and to protect her manufactures to the utmost possible 
extent, what was done ? The landed interests were sacrificed, 
capital employed in manufacturing was exempted from direct 
taxation under the excise, and raw materials were imported 
from foreign countries free of duty. As Mr. Wells properly 
says, "although not so termed, [this] is undoubtedly protec- 
tion in its most subtle and effective form, and as such has 
been recognized and commented on by the French economists ; 
inasmuch as it permits the British manufacturer to apply the 
largest amount of home labor to the smallest value of raw 
material, under such conditions as enables him to place his 
finished product in all foreign markets at the lowest possible 
cost." In other words, our system which "taxes the con- 
sumer," using the free-trade phrase, for the benefit of the 
manufacturer, is reversed, and the consumer is taxed more on 

' One limitation, at least, may be properly made to this principle. If a 
country possessing a natural advantage should seek to get more than a fair 
return for that advantage, other countries would be justified, it seems to us, 
in trying to correct such a state of things, so far as this could be done 
efTectively. 



1869.] TAXATION OF IMPORTS. 471 

his spirits and beer, and other things, so that the government 
can exempt the manufacturer from taxation. "Wherein tlie 
condition of the foreign consumer is improved by thus paying 
more for his beer and other commodities than he would pay 
if the manufacturers bore their proper share of taxation over 
the condition of the consumer in this country, who pays more 
for the things manufactured here, and is taxed less by the 
government for others, we are unable to perceive. If the con- 
sumer is taxed here for the benefit of the manufacturer, is it 
not also true that he is taxed for the same purpose in Great 
Britain, though, as Mr. "Wells says, in " its most subtle and 
effective form." And the subtlety and effectiveness consists in 
this, as the causes for the increased rate in British taxation are 
not clearly perceived, the tax is not thrown upon others, but is 
borne by the persons paying it, whereas in this country, when the 
price of a thing is raised through taxation, the effect, not infre- 
quently, is so clearly perceived that an attempt is made to throw 
it off to some extent and to diffuse it among a larger number. 
We are now in sight of a very interesting question, which 
has faced Congress from the beginning, yet has been growing 
in sharpness of feature with the diversifying of our industries. 
If one interest is protected, shall every one be, and if not 
all, where shall the line be drawn ? The American manufac- 
turer has never failed to perceive that the more widely the 
principle was extended, the less effective would or could be 
the protection granted. England solved that question with 
great boldness by declaring that the manufacturing and ship- 
ping interests should be protected at the sacrifice of the agri- 
cultural. If Congress had been more discriminating, and the 
general welfare had always been kept as clearly in mind as 
that of the interests applying, protection would have been so 



472 PIlSrANCIAL HISTORY OF THE UNITED STATES. [1878. 

moderate that rarely would an opportunity have arisen for 
makino- unreasonable fortunes, while the law thus conceived 
and executed by transferring from the consumers who could 
best part with a portion of their wealth, to those engaged in 
production, and who needed it more, would have stimulated 
the creation of wealth and equalized in some degree that 
existing. So far as the protective system has departed from 
this ideal, it has not wrought that perfect result which was 
possible. That such a system, however, involving so many 
interests, could work without friction and harm, would have 
been an unreasonable expectation. 

In 1872' another change was made in our tariff system 
consisting of a reduction of ten per cent in the entire list, one- 
half of the duty on salt, two-fifths of the duty on coal, an 
enlargement of the free list, beside adding to it tea and coffee.^ 
The consumers of coffee gained nothing, the impoi'ters of tea 
did a very little, the foreign producers nearly all.^ There was 
a short crop of coffee in the world, and it was easy for the 
producer to add the duty to the price. Had there been a 
large crop, the case would have been different, and either the 
importer or the consumer would have been the gainer. If 
advancing prices have followed a higher tariff, it is no less 
true that the importer and merchant have intercepted the tax 
when repealed, whenever they could. The public debt was 
large and the interest account heavy, and if a tax be a burden, 
why not pay the principal and thus escape the perpetual in- 
cumbrance ? These considerations should have been put into 
the scale when discussing the expediency of repealing the tax. 

' May 1 and June 6, 42 Cong., second session, chaps. 131, 315. 

' See Proceedings before Com. of Ways and Jleans, Feb. 21 and 25, 1871. 

' Senate Doc, No. 19, 40 Cong., second session ; N. Y. Times, June 5, 1880. 



1878.] TAXATION OF IMPORTS. 473 

The reduction in 1872 of the general list was effected with- 
out serious difficulty. As the House was desirous of making 
a considerable reduction, a bill of that nature was reported by 
the Committee of Ways and Means. Mr. Dawes, of ilassa- 
chusetts, was chairman of the committee, -and not agreeing 
with the recommendations of the report, it was made by Mr. 
Finkeluburg, of Missouri. The bill lopped ofp the duties in 
many directions. In the meantime another bill was recom- 
mended by the Finance Committee of the Senate, reducing the 
duties on the entire list ten per cent. Not all the protected 
interests favored the reduction, but Mr. Hayes, Secretary of 
the National Association of Wool Manufacturers and possess- 
ing much influence among manufacturers, advised the accept- 
ing of the measure. The woolen manufacturers were the 
first to agree, the iron makers followed, and soon all opposi- 
tion was overcome. The taxes on whiskey and tobacco were 
also lowered, and 4;hose on tea and coffee repealed. The 
Senate having passed the bill, it was sent to the House and 
substituted for the one recommended by the Ways and Means 
Committee. Many were opposed to it, and demanded a further 
reduction. In the end they voted for it, and so the bill passed. 
It may be worth while to inquire what was gained beside 
reducing the revenue ? It is said that this was a concession to 
the free-trade sentiment, but what effect did it have on prices? 
Literally none whatever. jNIanufacturers, notwithstanding 
the high rates of duty, had been reducing prices, through 
domestic competition, ever since the close of the war, and 
the bill did not effect them except to weaken the barrier 
between themseh'es and foreign competitors. There was no 
occasion for passiug it on the ground that manufacturers were 
gaining too much. Except as a means for reducing the 



474 FINANCIAL HISTORY OF THE UNITED STATES. [1875. 

revenue, it had no significance. Only one danger impended 
from the reduction — namely, that in times of excessive produc- 
tion in other countries, advantage would be taken of the lower 
rates to introduce more merchandise into our own country, 
and when, perhaps, an excess existed here, and so completely 
submerge our manufacturers. It is maintained, that a tariff 
tends to raise prices first and depress them afterward by stim- 
ulating excessive competition, and the history of American 
manufacturing proves the statement ; nor will it be denied that 
a more even price, yielding a fair remuneration, would be better 
for all interests. In reducing the tariff so low as to cause irreg- 
ular floods from abroad, the supply of commodities is subjected 
to another fluctuation. Has not our history shown that we can 
regulate prices better among ourselves than by putting the tariff 
so low as to invite these irregular inundations from other coun- 
tries ? ' This is a serious danger from reducing the tariff, while 
the paying of too high prices, even if a high, tariff be.continued, 
will never continue long if home competition be active. If ever 
a time should come when manufacturers in their desire to 
get wealth should be so forgetful as to abuse their opportunity 
and combine in order to extort high and unreasonable prices, 
the justification would be complete for withdrawing gov- 
ernmental assistance. The justification for tariff legislation is 
to destroy and prevent monopolies, not to create permanent ones. 
In 1875, the revenue having fallen to a lower point than 
was desirable the ten-per-cent reduction was repealed.^ It 
did not attract much attention, and had no effect on prices.' 

1 See former vol., pp. 366, 387. 

^ Acts, February 8, and March 3, 43 Cong., second session. 
' Interview between a Delegation of Manufacturers and Com. of Ways 
and Means, April 28, 1874. 



18S3.] TAXATION OF IMPORTS. 475 

They wci-e tending downward. Over-production, excessive 
trading and railroad building, bad marked our history, culmi- 
nating in the panic of 1873. 

At every session of Congress attempts were made to pass a 
new bill reducing the duties. In 1876, Mr. Morrison, the 
chairman of the Committee of Ways and jNIcaus, prepared and 
presented a bill. Nothing came of this attempt, and two }'ears 
later Mr. Fernando Wood, who \\as then chairman of the 
Committee on Appropriations, tried to do the same thing and 
failed.^ The three reasons which operated powerfully against 
these movements were : first, all the revenue was needed that 
came into the treasury ; second, prices were very low, and it 
was clearly evident that the manufacturers were not making 
too much, on the other baud, that many were running at a 
loss ; and, third, the sentiment in favor of protection was 
growing. So these revenue reform measures, as they were 
called, though vigorously pressed by a few, were not generally 
supported, and came to naught. In 1879, however, the duty 
on quinine was abolished, and this event was regarded with 
considerable satisfaction. 

At every session some speeches were made on the one side 
and on the other, for if a congressman were unable to master 
any question, he could easily prepare a speech on the tariff; or, 
if too busy or too indolent to do that, could easily get one pre- 
pared for a few dollars. In 1882, however, a movement was 
started that bore fruit. Congress appointed a Tariff Com- 
mission " to take into consideration, and to thoroughly in- 
vestigate, all the various questions relating to the agricultural, 
commercial, mercantile, manufacturing, mining, and industrial 
interests of the United States, so far as the same may be neces- 
1 8 Bulletin of Association of Wool Manuf., p. 113. 



476 FINANCIAL HISTORY OF THE UNITED STATES. [1883. 

sary to the establishment of a judicious tariff, or a revision of 
the existing tariff upon a scale of justice to all interests." 

Several things it was expected would be accomplished by 
revisins; the tariff, and the measure received the assent of 
nearly all the members of Congress. The free-traders expected 
to get lower duties, the protectionists expected to concede them 
in some cases, and in others to get such modifications as 
would remove existing ambiguities and strengthen themselves 
against foreign competition. The protective force of the exist- 
ing tariff had been weakened in several important manufac- 
tures by rulings of the treasury department, particularly with 
regard to steel wire rods, imported for drawing into smaller 
sizes, steel blooms which are rolled into rails, hoop-iron, and 
cotton ties, channel-bars, tank-iron, and other matters. It 
was hoped that the disadvantages from which the manufac- 
turers were suffering in consequence of these rulings would be 
removed by an intelligent revision. 

The composition of the commission was as satisfactory to the 
manufacturing class as displeasing to free-traders. The com- 
mission heard all interests at much length, and sought to do 
their work thoroughly and with fairness. In determining the 
rates recommended by the commission, the members were 
governed solely, so they declared in their report, by their own 
views of justice, expediency, and a regard for the interests of 
consumers and the public sentiment of the country. Early in 
their deliberations, the commission became convinced that a 
substantial reduction of the tariff duties was demanded, not 
by a mere indiscriminate j)opular clamor, but by the best con- 
servative opinion of the country, including that which had in 
former times been most strenuous for the preservation of the 
national industrial defences. Such a reduction of the existing 



1883.] TAXATION OF I^MPORTS. 477 

tariff the commission regarded not only as a due recognition 
of public sentiment, and a measure of justice to consumers, 
but one conducive to the general industrial prosperity, and 
which, though it might be temporarily inconvenient, would 
be ultimately beneficial to the special interests affected by such 
reduction. Xo rates of defensive duties, except for establish- 
ing new industries, which more than equalized the conditions 
of labor and capital with those of foreign competitors, could be 
justified. Excessive duties, or those above such standard of 
equalization, were positively injurious to the interest which 
they were supposed to benefit. They encouraged the invest- 
ment of capital in manufacturing enterprise by rash and, 
unskilled speculators, to be followed by disaster to the adven- 
turers and their employees, and a plethora of commodities 
which deranged the operations of skilled and prudent enter- 
prise. Numerous examples of such disasters and derange- 
ments occurred during and shortly after the excessively pro- 
tective period of the late war, when tariff duties were enhanced 
by the rates of foreign exchange and premiums on gold. 
Excessive duties generally, or exceptionally high duties in 
particular cases, discredit the national economic system, and 
furnish plausible arguments for its complete subversion. 
They serve to increase uncertainty on the part of industrial 
enterprise, whether it shall enlarge or contract its operations, 
and take from commerce, as well as production, the sense of 
stability required for extended undertakings. " It would seem 
that the rates of duties under the existing tariff— fixed, for the 
most part, during the war under the evident necessity at that 
time of stimulating to its utmost extent all domestic produc- 
tion — might be adapted, through reduction, to the present 
condition of peace requiring no such extraordinary stimulus. 



478 FINANCIAL HISTORY OP THE UNITED STATES. [1883. 

And in the mechanical and manufacturing industries, especially 
those which have been long established, it would seem that 
the improvements in machinery and processes made within the 
last twenty years, and the high scale of productiveness which 
had become a characteristic of their establishments, would per- 
mit our manufacturers to compete with their foreign rivals 
under a substantial reduction of existing duties." Entertain- 
ing these views, the commission sought to present a scheme of 
tariif duties in Avhich substantial reduction was the distinguish- 
ing feature.^ 

The free-traders were as surprised with the reductions as 
were some of the manufacturers. It could not be expected 
that all would be satisfied. Interests diverged in a thous- 
and ways, and the only principle that could guide the com- 
mission in performing their diiRcult duties was, how far could 
they go in granting the requests of each class of manufacturers, 
and maintain an equal regard for all other classes of manu- 
facturers and the public. That they attempted conscientiously 
and intelligently to do this not many will deny. 
. Those who did not get as much protection as they desired 
appealed to Congress. They were very much like Dr. Hay- 
den, of the Geological Survey, who, when asked if he favored 
the bill for consolidating all the surveys, said he was in doubt. 
The doubt consisted in the probable effect of the bill on him- 
self If likely to be chosen director, he favored the bill ; if 
not, he fl-as opposed to it. Those whose interests were not 
injuriously affected by the report, believed in it ; those whose 
interests were likely to suffer, endeavored to get redress 
through Congress. The hearings before the commission were 
open and fair, and Congress should have hesitated to re-open 
' Report of Tariff Commission, p. 5. 



1883.] TAXATION OP IMPORTS. 479 

the battle. The history of tariff-making is not particularly 
honorable in all its details to any party or interest. It has 
too often partaken of a personal fight by manufacturers against 
the public and each other. The struggle, on this occasion, 
before Congress lasted nearly the whole session. It was 
earnest, and sometimes bitter. Some interests were satisfied 
^rith the final result, others were not. 

The attempt to modify the tariff brought into bold relief 
the numerous conflicting interests, and the difficulty and 
delicacy of the undertaking. As our industries become more 
heterogeneous, the tariff also grows more complex, and the 
difficulty of doing justice to all is increased. For example, 
the wool manufacturers to succeed best must have free wool 
and dye-stuffs ; on the other hand, both these interests desired 
protection. The manufacturers of the higher forms of iron 
must have free materials to succeed best; on the other hand, 
the ore producers, the pig-iron manufacturers, and every suc- 
ceeding class desired a tariff on their products. It was not 
easy for these interests to agree, and some of them did uot. 
The iron-ore producers desired a tariff of eighty-five cents a 
ton on ore ; the steel-rail makers were opposed to the granting 
of more than fifty ; the manufacturers of fence wire were 
opposed to an increase of duty on wire rods used for making 
wire, aild favored a reduction ; the manufacturers of rods in 
this country were desirous of getting an increase; the manu- 
facturers of floor oil-cloths desired a reduction or abolition of 
the duty on the articles used by them; the soap manufacturers 
desired the putting of caustic soda on the free list, -which the 
American manufacturers of it opposed ; some of the woolen 
manufacturers were desirous that protection should be granted 
to the manufacturers of dye-stuffs, and some were not ; the 



480 FINANCIAL HISTORY OP THE UXITED STATES. [1883. 

manufacturers of tanned foreign goat and sheep skins desired 
the removal of the tariff on such skins; those who tanned them, 
and A\'Iio were much less numerous, were equally tenacious in 
maintaining the tariff on the raw skins, and the same conflict 
arose between other interests. The method of determining 
how much protection their several interests needed, and of 
adjusting differences between them, has always been of the 
crudest kind. The commission heard all interacts, and evi- 
dently sought to act justly and intelligently, but a perusal of 
evidence collected, and of their report, discloses the difficulty 
of their task, and the necessarily unsatisfactory nature of the 
result. So long as manufacturers merely say they are making 
no money, or not much, and furnish no precise statement, 
they will be skeptical of one another, and the conflict between 
them will continue. If the tariff commission investigation 
revealed anything, it was that correctness of statement is 
required all around in order to adjust rates fairly between 
those desiring protection. 

Although not all of the recommendations of the commission 
were adopted, most of them were. Those which pertained to 
the simplificiition of the law were adopted with only slight 
changes. The bill reported by the commission contained, not 
including the free list, six hundred and thirty-one articles and 
classifications. Of these, five hundred and twenty-four were 
taken exactly from the commissioner's report, and more than 
half of the remaining one hundred and seven articles were 
mere additions of trifling articles by name, which the commis- 
sion, for brevity's sake, included under general clauses, or 
inadvertently overlooked. Less than twenty-five articles, 
mainly in tlio cotton, woolen goods, and the iron and stesl 
schedules, were matters of contention. The rates on four 



1883,] TA'XATIOX OF liirOKTS. 481 

hundred and nine of the six hundred and thirty-one articles 
mentioned in the tariff recommended by the commission were 
adopted, and between fifty and sixty more articles have sub- 
stantially the same rates, though levied under different clauses. 
Of the one hundred and seventy changes, ninety-eight were 
fixed at lower rates than those projjosed by the commission, 
forty-six at higher, and twenty-six have been classed as 
doubtful. 

As a revenue measure, the tariif has been an unquestioned 
success. Since 1862 the yield has been very great. Indeed, 
one object of reducing the rates subsequently has been to 
diminish the revenue. 

As an effective measure of protection opinions have greatly 
differed. That the wealth created by manufacturing has 
enormously increased is apparent, but why ? The manufac- 
turers generally ascribe the increase to the tariff ; yet how can 
this statement be reconciled with one so often heard that 
manufacturing is unprofitable. How can this seeming paradox 
be explained ? After the woolen tariff of 18G7, new mills were 
built, the business was soon overdone, and then followed a 
long gloomy period of depression and loss. The true way to 
answer the question is to consider the history for a long 
period, inasmuch as any kind of answer may be obtained for 
a short one, depending wholly on the period selected. The 
greater value of the manufacturing plant is positive proof, 
unless it be contended that the money invested has been drawn 
from sources outside manufacturing. While this is true to 
some extent, a much larger amount of wealth acquired in manu- 
facturing has been invested in railroads and other enterprises, 
so that the entire account shows a large gain from the pursuit. 
There are two classes of manufacturers corresponding to the 

31 



482 FINANCIAL HISTORY OF THE UNITED STATES. [1884. 

two classes of farmers : one class never make any money, and 
see only dangers and depression and foul weather. The other 
class are more hopeful, acknowledge their gains, and rejoice 
over them. The first class are always living under the 
shadow of adverse governmental action, like doubting farmers, 
who, however bountiful may be the supply of water, expect it 
will dry up soon, and the scorching sun burn the land to a 
crisp. Each class are an equipoise to the other, keeping the 
scale of governmental action better regulated, and profits 
nearer to the right figure. If it be true that the success of 
the manufacturers is not wholly due to the tariff", it is likewise 
true that their losses do not always spring from the same 
cause. The effectiveness of labor-saving machinery, the gener- 
osity of nature, and many other advantages, have rmques- 
tionably contributed to their success. In short., it is due to a 
series of complex causes, and many of the errors arising in 
the discussion of this subject spring from the selection of one 
or two causes and the omission of the rest. It must be con- 
ceded that amoug the causes which have contributed to their 
success, but constantly varying in effectiveness, has been the 
tariff. On the other hand, the adversities of manufacturers, 
while sometimes caused by governmental action, have also 
been caused in other ways, and the opponents of the tariff 
system have' sometimes ascribed these to the wrong cause. If 
invention has been a great aid, so has it been a costly one. 
Millions of dollars of machinery have been supplanted by 
better. At the present time a revolution is going on in the 
making of pig-iron by the introduction of an improved fur- 
nace, which has four-fold the capacity of the old one. Those 
who are making iron by the old process are having a hard 
time, and sooner or later must succumb. Others, seeing the 



1884.] TAXATION OF IMPORTS. 483 

hopelessness of the struggle, are tearing down their furnaces 
and building anew. It would be possible, perhaps, to make 
a tariff high enough to protect botli classes of manufacturers. 
Such a steji, though, could not be defended. Tlie people are 
fairly entitled to the advantage thus gained, and the possessors 
of the old cannot complain if the government will not protect 
them in sticking to the more costly mode of production. If 
the people had not the means to take advantage of tlie best 
and most economical methods of manufacturing in our own 
country, the case might be otherwise. Having the means, those 
M'ho are working in the old ways cannot be justified by law. 
To do so would be to put a premium on the inert and to dis- 
courage those who are striving after greater perfection. The 
manufacturer of pig-iron by the old process, therefore, who 
cannot compete with the manufacturer by the new in conse- 
quence of the new invention, ought not to ascribe his ill-suc- 
cess to the tariff, nor ought any one to be sustained in the de- 
lusion that the tariff" ought to be changed to rescue a perishing 
industry which is in that state in consequence of following a 
wrong method. 

Changes of this nature are constantly going on in the manu- 
facturing world. Invention is ever alert. New mines of iron, 
coal, petroleum, and other minerals are discovered, which ren- 
der the old unprofitable for working ; new railroads are built 
that divert trade and transform flourishing cities into a wilder- 
ness. A thousand causes have acted and re-acted on manu- 
facturers, among which the tariff" has contributed potently 
to their success. It is not equally true, however, that 
the tariff" has been the principal cause of their failures. A 
prominent one has been their lack of skill and experience. 
The proof of this is seen on every hand. Skillful manufac- 



484 FINANCIAL HLSTOEY OF THE UNITED STATES. [1884. 

turers have made money at times when others having as much 
capital and equal natural advantages have failed. Some have 
said that if no tariff had been established, the unskillful 
would not have been drawn into manufacturing, which is 
quite likely ; yet it does not follow that they would have been 
more successful at something else. On the other hand, the 
pathway of mercantile pursuits, which is as free as possible, 
is strewn with a larger number of failures aud unskillful con- 
cerns than any other. It has been assumed by Congress that 
only competent persons would engage in the business, and if 
others have done so and failed, they could rightly blame only 
themselves. Regarded in their entirety, the manufacturing 
interests have been successful, and not many will question 
this statement. " The country has grown marvelously under 
the system adopted. Of that there can be no doubt." ' 

We now turn to the consumer and inquire whether his gains 
have been as large as he expected, or whether they have been 
large enough to justify the sacrifice incurred. For all will 
admit that, in the beginning at least, prices wore raised to some 
extent by the tariff. What answer shall be given ? Have not 
prices been much reduced? The history of receding prices 
need not be given here. 

What wdiild have happened to the farmer if the tariff had 
not been imposed? Would he have bought at lower prices? 
By many it is maintained that he would ; by others this propo- 
sition has been strongly contested. What would he have 
obtained for his products ? Admitting that they would have 
gone abroad freely, the foreigner, by reason of his enormous 
capital and ability to wait, would have made the prices, and 
the prices here would have conformed to them. For if the 
» Editoriul, N. Y. Times, July i, 1883. 



1884.] TAXATION OF IMPORTS. 485 

farmer had insisted on demanding higher prices from the 
American consumer, he could liave satisfied his wants by im- 
porting. Thus the only possible advance for tlie American 
farmer over the European price would have been the cost of 
transportation. Under the existing system the farmer has 
influenced the price abroad, and has been more and more 
powerful in making it as his wealth increased. He has de- 
manded more than he would have otherwise, and his market 
has been larger and more certain. Important as the foreign 
market is to him, it is of secondary importance to the home 
market, which has become large in consequence of adopting a 
policy which has attracted so many millions to our shores to 
engage in manufacturing enterprises. Their presence increases 
the consuming power of the nation, renders land more valu- 
able, and, in turn, stimulates a better cultivation. Such are 
the conclusions clearly warranted by our industrial experience. 
Finally, it may be asked, are prices as low as they A\-ould 
be if no tariff existed ? Perhaps they are ; perhaps they are 
lower. This criterion should not blind us to a better one, 
independently of the more comprehensive test of social ad- 
vancement. Fair prices are more to be desired than very 
high or very low. ones. When high prices issue from 
monopolies, somebody is likely to gain unduly ; when very 
low, they are likely to be wrung from the ill-paid laborer. 
The low price thus caused should be as keenly regretted as 
the high price of .the monopolist. Neither of these industrial 
conditions are healthy. The best price is a fair £rice, which 
is a fair equivalent for the service or thing exchanged. 
Have the introduction and maintenance of the tariif system 
disturbed the conditions of fair exchange ? If the freedom 
of the buyer has been restricted in purchasing, has he not 



486 FINANCIAL HISTOEY OF THE UNITED STATES.. [1884. 

at all times commanded the price of his own products, and, 
in selling them, stood on as high vantage ground as the 
manufacturer? Is not every person like a coin possessing 
two sides, a buyer's side and a seller's, and if, through the 
operation of the tariff system, the buyer has paid more than 
he wished, could he not increase the price of his own product 
and thus equalize the gain ? This was possible when both 
buyer and seller were in the same country, but would not have 
been had the buyer lived here and the seller elsewhere. 

Of course, every increase of price to the protected buyer 
was a diminution of his protection. Those who sold to him 
and others, however, in most cases, had a better way than that 
of advancing prices to regain their seeming loss. The area of 
their sales was enlarged and their aggregate profits were con- 
sequently maintained, or increased. The farmers, especially, 
if they paid more for many things, and yet added nothing 
to the price of their products, had a constantly widening mar- 
ket with the industrial development of the country, and so 
added to their wealth. Friction has, indeed, existed between 
the several classes ; there has never been an hour of perfect 
harmony in the industrial world anywhere. Whether the 
friction in this country has been increased by the presence of 
the protective system, whether one class of persons, or inter- 
ests, have thriven at the loss of another, is regarded by many 
as an open question ; by free-traders as settled affirmatively ; 
by protectionists as settled the other way. The evidence 
pertaining to the subject would fill many a volume, and is 
constantly accumulating. The popular judgment, certainly, 
is that every important industry has been helped more than 
injured by the presence of the others. The correctness of this 
judgment is daily question^, and will be, doubtless, so long 



1S84.] TAXATION OF IMPORTS. 487 

as the existing system sliall stand ; aud if it shall be displaced 
by another, that one, \vhatever it may be, ^\ ill never satisfy 
all. A harmony of interests, though the universal longing 
of the world, is a long way off, yet the clearest marks of 
progress are everywhere visible, and, especially, in the more 
intelligent production and fairer distribution of wealth. 

Thus in a brief way we have gone over a great subject, 
whose earlier history was closely bound up with the origin of 
the government, and whose later history is glorified with an 
accumulation of wealth, experience, and general well-being 
that is the marvel of the world. The taxation of imports, 
which, in the beginning, prevented a closer union of the States 
than the feeblest combination, and possessing no common life, 
finally drew them by the imperious force of necessity into a 
union which has been strengthening with the years, and which 
long ago gained sustenance from a more enduring principle 
than that from which it sprung. In this long interval the 
taxing of imports has always held a prominent place in the 
national legislation, and has caused no little debate and 
ill-feeling. Is the gap between the contending parties as wide 
as ever ? In this long controversy several great facts have 
clearly emerged into view, with the statement of which we 
may fitly close our chapter. 

The first fact is that the principle of protection is more V 
completely embedded in public sentiment than in any former 
period. The evidence is abundant. If we turn to the eon- 
duct of political parties, we see that the platform.s built from 
time to time by the Republican party have been growing 
stronger. The Democratic party, while not equally pronounced 
on this subject, have, nevertheless, been building in the same 
direction. At one time that party strongly favored free-trade, 



488 n^JAXCIAL HISTORY OF THE UNITED STATES. [1884. 

passed the tarifp of 1846, and adhered to it; but within the 
last fifteen years especially their platforms have been clianging.^ 
The leaders of both parties are desirous of getting and 
retaining the votes of the wage-workers, who also are con- 
sumers. The political leaders clearly see that the great body 
of wage-workers favor protection, and why ? Because they 
are surer of the preservation of the market for the American 
manufacturer and, consequently, of employment for them- 
selves ; and because prices generally are not unreasonably high 
in comparison with those received for their labor, The second 
fact is, that the people are more and more opposed to those 
radical forms of protection whereby great fortunes can be 
swiftly acquired. Whence it follows that opinion on this 
subject is nearing a central line, that of reasonable protection, 
or the kind that is truly for the general welfare. That line 
is unassailable, and behind it our manufacturers can work and 
thrive in security. If they attempt to go beyond, they expose 
themselves to assault, with the certainty of ultimate defeat. 
' See Appendix A. 



1861.] COLLECTION OF THE CUSTOMS EEVENUE. 489 



CHAPTEE VIII. 

COLLECTION OF THE CUSTOMS EEVENITE. 

The administration of the customs-revenue law has always 
been difficult and unsatisfactory. New York has been the 
chief port of entry, and the main interest of this chapter cen- 
tres, therefore, around the New- York Custom-house. 

When President Lincoln assumed the presidential office, 
Hiram Barney was confirmed as collector of that port. Repub- 
licans soon filled most of the offices at the other ports, except 
the Southern ones, which were closed. When the ^^■ar ended 
the Southern ports were opened, and from Eastport to Browns- 
ville on the Eastern coast, and from Port Townsend to San 
Diego on the Pacific, and along the Northern border from 
Duluth to Ogdensburg, the custom-house existed, and a large 
army of officials were administering the law. When Mr. 
Sherman became secretary of the treasury, he strongly recom- 
mended the closing of many of these offices which yielded an 
insignificant return, and so did Secretary Eolger. Their rec- 
ommendations were disregarded. 

The principal custom-house officers have been appointed 
by the President and confirmed by the Senate. Generally 
their selection has been from the State in which they were 
to serve, although there was no reason for doing so. The 
revenue has been collected for a public purpose, and the 
mere accident of location of the ports ought not to have been 
considered in selecting the officers for administering the law. 



490 FINANCIAL HISTORY OF THE UNITED STATES. [1878. 

If a different principle had been observed in making selections, 
the local power of political leaders would have been neutral- 
ized. From 1875 to 1881, when Mr. Conkling was the only 
Republican senator from New York, he was a powerful polit- 
ical boss, because he largely controlled the appointments, and 
through them exercised a demoralizing influence. His power 
culminated in 1878. An investigation into the afiairs of the 
New- York Custom-house, which began immediately after the 
inauguration of President Hayes, revealed no little inefificiency, 
and the President determined to supersede the collector, sur- 
veyor, and naval officer. Messrs. Merritt, Graham, and Burt 
were selected for the places. Senator Conkling was madly 
opposed to the change. The Jay Commission had rendered 
their report, giving a clear and dispassionate history of the 
administration of the custom-house under General Arthur. 
]\Ir. Sherman transmitted the report to the House, and after- 
ward sent a letter to the Senate, in which he briefly and calmly 
summarized the chief charges against the collector.^ 

General Arthur replied, sho-sying that some of the secretary's 
statements were erroneous, though not the weightier matters 
therein set forth ; for they were unanswerable. No fraud 
was imputed to the officers removed, but their administration 
was marked with inefficiency; and the frauds of subordinates, 
while ahvays perpetrated, doubtless, to some extent, had grown 
much. The contest in the Senate continued for several weeks, 
ending in the confirmation of the new appointees by nine 
votes.^ The secretary of the treasury exerted himself to the 
utmost to succeed, for defeat would have been a serious thing for 
the administration. Senators were personally solicited to vote 
for confirmation, and these appeals were effectual. At first, the 
' For letter and reply, see N. Y. Times, Jan. 28, 1879. ' For collector. 



1881.] COLLEOnON OF THK CUSTOMS REVENUE. 491 

Democrats proposed to let the Republicans fight the battle. 
Finally they joined in the fray, Senator Bayard making the 
leading speech in support of confirmation, and Senators Voor- 
hees, of Indiana, and Kernan, of New York, the speeches in 
opposition. Twenty Democratic senators voted aye, and 
five no; while among the Republicans the aye vote was 
twelve and eighteen voted no.' Thus, without the Democratic 
support, the administration would have been defeated. One 
objection that Senator Kernan raised to the new collector was 
his career as a political trickster, and that, however debased 
the office might have been for political purposes, General 
Merritt would go further. His prediction was not fulfilled. 
General Merritt introduced rational methods, the business of 
the office was conducted with promptness, favoritism came to 
an end, and less complaint was made against his administration 
from importers than had been made for a long period. 

The contest over General Merritt's appointment, though 
fierce and long continued, was, after all, a tame affair com- 
pared with that over his successor, Mr. Robertson. He had 
been an enthusiastic supporter of Mr. Blaine for the presi- 
dency, and thus had incurred the ill-will of Mr. Conkling. 
Mr. Blaine, who was now secretary of state, desired that Mr. 
Robertson should be nominated for district-attorney for the 
Southern district of New York. The President, at first, sent 
into the Senate several nominations which were as pleasing to 
Mr. Conkling as they ^vere highly displeasing to many others 
of his party outside, and especially inside his own State. In 
order to square the account somewhat, and, without consulting 
Mr. Blaine, the President shortly afterward sent into the Senate 
Mr. Robertson's name as collector of the port of New York. 
1 This included one Independent. 



492 FINANCIAL HISTORY OF THE UNITED STATES. [1881. 

When the name was known in the Senate, Mr. Conkling was not 
slow to discern its meaning. Lilie Brunswick's fated chieftain 
at the Brussels ball the night before the battle of AYaterloo, he 
was the first to hear the sound of war and rush into the fray, 
and fell almost as suddenly, ending one of the longest and 
most turbulent careers of political bossism ever known in 
this country. Action on the nomination was delayed many 
weeks. The President, having weakened under the fierce fire^ 
of his adversary, wished to withdraw Mr. Robertson's name, 
but, through the influence of his more steady-minded secre- 
tary of state and others, he was prevented from yielding. In 
this angry contention, Mr. Conkling resigned his seat in 
the Senate, and likewise his colleague, both expecting that 
an obedient Legislature would immediately re-elect them, 
thus furnishing them with a kind of letter of marque and re- 
prisal to wage war on the President. The Legislature delayed 
to act at once, and the people, long tired of ]Mr. Conkliug's 
rule, finally awoke to the determination of delaying, and, if 
possible, preventing their re-election. Although a large ma- 
jority of the Legislature were in their favor, the pressure 
finally brought on the members from without to vote for other 
men was tremendous. Day after day the balloting went on 
without accomplishing anything. Nevertheless, every day's 
delay weakened the chances of re-electing the ex-senators. 
The people were growing bolder, the glamor of jNIr. Conk- 
ling's name was passing away, and those who were looking 
after themselves sharply did not fail to perceive that if Mr. 
Robertson were confirmed and Mr. Conkling defeated, his 
name would be no charm with the administration. After a 
long and stubborn fight, others were elected to the vacant 
seats, Mr. Robertson was confirmed as collector, and ]\Ir. 



1S61.] COLLECTIOX OF THE CUSTOMS REVENUE. 493 

Coukliug's occupation was gone. Mr. Conkling met his de- 
feat at the hands of his friends because they no longer dared 
thwart the popular will. Thus may we hopefully believe tliat 
a just judgment sooner or later shall overtake all who, professing 
to serve the people, in truth, force the people to serve selfish 
leaders intent on perpetuating and streugthening their power. 

It was fitting to linger over these two appointments because 
thev were so exceptional. When Mr. Arthur succeeded to the 
presidential chair, J\lr. Conkling importuned him to remove 
Mr. Robertson. The President's desire to gratify his friend 
was very strong. Had he yielded, however, to the request he 
would have embroiled his party and seriously injured his own 
reputation. The President merits no little credit for resisting 
the strong pressure from his most intimate friends, who were 
eager to overturn the custom-house, and to convert it into a 
place for hungry politicians and the cultivation of " plums." 

The expense of collecting the revenue in 1861 was defrayed 
by a semi-annual appropriation of §1,800,000, in addition to 
the sums received from fines, penalties, and forfeitures con- 
nected with the customs, and from fees paid into the treasury 
by customs officers, storage, cartage, di-ayage, labor, and ser- 
vices. The sjjecific appropriation was for increasing the com- 
pensation to those collectors and other officers whose percent- 
age on all moneys received by them for duties on imports and 
tonnage was inadequate. 

The collecting officers have sought to reap the largest 
rewards they could in two ways : by the legal or semi-legal 
increase of expense to the importers, and sometimes by fraud. 
In New York, where the complaints have been the most 
frequent, a long series of vexatious charges to importers were 
rooted in the " general order " business, which will be briefly 



494 FINANCIAL HISTORY OF THE UNITED STATES. [1861. 

explained. After a vessel liad entered at the custom-house, a 
certain time was allowed to the consignee of merchandise for 
paying the duties and taking possession of the goods. After 
that time had expired, a general order was given by the collector 
of the port to discharge the cargo, and all merchandise 
remaining on board was landed and delivered into the custody 
of the custom-house officials. Goods discharged under this 
order were known as general order goods. For more than 
fifty years five days were allowed for this purpose. In 1854 
they were reduced to three, and in 1861 to a single day. The 
secretary of the treasury, however, so interpreted the law that 
importers could make these entries and remove the goods 
within forty-eight hours after the arrival of the vessel. Prior 
to 1854, the time was so ample for the merchant to pay his 
duties and take his goods, that the small quantity left to be 
discharged under general order were stored by the govern- 
ment. With the increase of steam vessels, the time was 
shortened at the request of ,the ship owners. To steamship 
lines having regular days for the sailing of their vessels, the 
prompt unloading of their cargoes was absolutely necessary. 

With tlie shortening of the time, importers were unable to 
remove as many of their goods as they had done previously, 
and the remainder were put into a " general order store," by 
virtue of a general order issued by the collector.^ From this 
place they could not be taken until all charges due to the 
warehouse proprietor had been paid. These consisted of the 
cartage of the goods from the vessel to such stores, and their 
storage. The treasury regulation relating to the matter pre- 

' The Cunard and North German Lloyds were allowed the storage of such un- 
claimed goods as they transported in their own warehouses, which were under 
government supervision. Senate Report, No. 227, 42 Cong,, second session. 



1867.J COLLECTION OF THE CUSTOMS REVENUE. 495 

scribed that the charges should " not exceed, in any case, the 
regular rates for like merchandise at the port of importation." 
The business soon assumed large proportions, and- "the 
facile opportunity of its itemized nature admitting the con- 
stant absorption of small unlawful additions thereto, conspired 
to render its concession or lease eagerly sought after, as, in 
brokers' phrase, capable of being made a good thing." AYIien 
Henry A. Smythe became collector, he early gauged the ap- 
preciable value and commercial use he could make by the dis- 
posal of the general order business, declaring, as he did, the 
very first day of his official life, " The North Eiver general 
order business is the big plum for the collector." Before his 
confirmation by the Senate, possibly before his nomination, 
even, he had agreed with certain persons that they should be 
pecuniarily benefited by the allotment or concession of the 
"plum business." Accordingly, the general order business 
was farmed out in an extraordinary manner, and the " legal 
rates and charges " were so enormously increased as to arouse 
justly the indignation of importers.^ 

' " Lanman and Kemp had twenty cases of quinine in Johnson's ware- 
house, the legal rates and figures on which would be as follows : 
Twenty cases, storage, ten cents each, ...... ^2.00 

" labor, " " 2.00 

" cartage, 1.32 

5.32 
The bill was rendered as follows : 

Twenty cases, storage, fifty cents each, $10.00 

" labor, " " 10-00 

" " cartage, 10-00 

30.00 
"It was testified before the committee that bills of such 'make up' could 
be multiplied almost ad infinitum."— Tiome Report, No. 30, 39 Cong., second 
session. 



496 FINANCIAL HISTOEY OF THE UNITED STATES. [1870. 

•The committee who investigated into these matters, after a 
long " enumeration of Mr. Smythe's profligate practices in 
connection with the New-York Custom-house, paused from no 
lack of material, believing the finding abundantly sufficient to 
warrant and require and ensure his immediate removal from 
the office of collector of the port of New York." ' 

The evil did not cease with the change of a collector. All 
the goods from the vessels to the storage warehouses were re- 
quired to be carried by a cartage bureau created by the col- 
lector. Previously, this work had been done by " merchants, 
carmen," or "sliip carmen," who were licensed by the collector, 
and gave bonds for the delivery of the merchandise entrusted 
to them The new system was illegal. It was indeed the 
creation of the district carmen, sanctioned, it is true, by the 
collector. Its officers and agents were not officers of the gov- 
ernment, gave no bonds, yet were permitted to assume an ab- 
solute control over imported merchandise. The merchants of 
New York claimed that as they gave bonds to the amount of 
double the dutiable value of their goods before they could ob- 
tain a permit for their removal from the docks, and having 
done all that the law required of them, they should be allowed 
to cart their oN^-n goods to the bonded warehouses ^^'ithout pay- 
ing the bureau tax, from Avhich they received no benefit. The 
collector established rates which were very high, though not 
so exorbitant as those previously charged in carrying goods 
under Mr. Smythe's administration. Secretary Boutwell or- 
dered the abolition of the cartage bureau before Mr. Grinnell 
went out of office." The general order business, however, re- 

^ House Report, No. 30, 39 Cong., second session. 

' See letter to N. Y. collector, May 25, 1870, Ex. Doc, No. 313, 41 Cong., 
second ses.iion. 



1870.] COLLECTION OF THE CUSTOJrS EEVENTJB. 497 

mained. The new collector, too, increased it by closing the 
■warehouses of the foreign steamship lines in Jersey City and 
Hoboken, which were under the control of United States offi- 
cers. They were erected on the wharves of the steamship 
companies in order that goods might be quickly unladen, and 
"the practice existed for many years to the satisfaction of all 
parties." In February, 1870, the collector "ordered that all 
goods discharged under general order should be sent to general 
order stores in New York under the control of private parties, 
where they were charged a month's storage, although removed 
by the owners instantly on their arrival." The Joint Select 
Committee on Retrenchment who investigated the matter at this 
time declared that they were able to discover no advantage re- 
sulting from the change " to any one except parties controlling 
the general order business." ^ The reasons given by the col- 
lector for taking the general order goods away from the Jersey 
City and Hoboken stores were, that they were unsafe, and that 
losses resulted therefrom both to the merchants and to the gov- 
ernment, that they were also used for bonded goods, and that 
the steamship companies or their agents were themselves im- 
porters, having their own goods in these stores. These reasons 
were imaginary, and the committee recommended that until a 
preferable system should be devised, merchandise discharged 
under general order from foreign steamers at Jersey City and 
Hol^oken should be sent, as formerly, to general order stores 
on the docks at which the steamers landed, under such in- 
creased sujjervision as the secretary of the treasury should 
direct.^ 

The recommendation was not executed by the secretary of 

' Senate Beport, No. 227, 42 Cong., second session. 

2 Senate Keport, No. 380, 41 Cong., third session. 
32 



498 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

the treasury. The collector was changed ; Thomas Murphy 
succeeding Mr. Grinnell, and Leet and Stocking succeeding 
to that portion of the general order business that had been 
conducted by the steamship companies. Uuder the former 
collector they had been connected with anotlier firm who were 
engaged in it; and, consequently, were not novices when 
appointed by Mr. Murphy. The steamship companies were 
desirous of recovering their business, and the importers were 
dissatisfied with the system. The next year, therefore, the 
Senate ordered another investigation. This was very elabo- 
rate, the evidence covering more than two thousand pages.' 
All the galleries of this mysterious subterranean general order 
business were thoroughly explored. The specific charges 
against Leet and Stocking were, that they had not kept the 
goods sent to them securely, nor delivered them promptly, 
and had charged exorbitantly. These were declared to be 
unfounded, and if evidence were needed, said the committee, 
" of the wantonness of the charges," it was " found in the 
cliaracter of the relief invariably proposed." What was this ? 
Not to deprive Leet and Stocking of the general order 
business, but only to restore a part of it to the Cunard Com- 
pany, and another part to the North German Lloyds. The 
committee maintained that if Leet and Stocking had " abused 
the privilege accorded them, the remedy clearly was to take 
this privilege away." This had not been proposed. The 
committee did not think the steamship companies " ought to 
have control of general order stores," thus differing radically 
from the committee who examined the subject during the 
previous Congress. Senators Bayard and Casserly made a 
lengthy minority report, and thus ended an elaborate con- 
' Senate Eejiort, No. 227, 42 Cong., second session. 



1863.] COLLECTION OP THE CUSTOMS KEVENUE. 499 

gressional -series of investigations into the methods of swellino- 
the returns to the collector at the chief port, of entry in our 
country. 

There was another " plum " for the collector of the moiety 
variety, which attained its full size in 1873. The revenue law 
of 17 [1 9 provided that every collector, naval officer, or sur- 
veyor, who had cause for suspecting a concealment in any 
place of goods on which duties had not been paid, should be 
entitled to a warrant, on applying to a justice of the peace, to 
enter such place in the daytime, and " seize and secure the 
goods for trial." This law authorized the seizure of suspected 
property, but not private books and papers, for the purpose 
of using them as evidence to condemn property. The law of 
1863^ greatly enlarged the power of the collector to prevent 
and punish frauds on the revenue. This Act was drawn by 
the solicitor of the treasury," Mr. Jordan, and by it he liad 
cognizance of frauds, or attempted frauds on the revenue, and 
was bound to exercise a general supervision of measures for 
their prevention and detection, and for the jjrosecution of per- 
sons charged with committing them.^ Pie had sole control of the 
books and papers seized from the merchants by order of a dis- 
trict judge of the United States, and on his recommendation 
any claim in favor of the government could be compromised. 

' Act, March 3, 37 Cong., third session, chap. 76. 

^ The office of solicitor of the treasury was created in 1830, May 29. lie 
had charge of all suits or actions for the recovery of any fine, penalty, or 
forfeiture. Hf had also power to instruct di.strict-attorneys, marshals, and 
clerks of the federal courts in all matters appertaining to suits, in which 
the United States was a party or interested. He had authority to establish 
regulations for the observance of collectors, district-attorneys and marshals. 

^ Proceedings of Boston Board of Trade and X. Y. Chamber of Com- 
merce, relating to revenue laws, 1874. 



500 riNANCIAL HISTORY OF THE UNITED STATES. [1865. 

Though subordinate to the secretary of the treasury and to 
the President, the solicitor was the real head in atlministering 
the law, as all applications made to either of those officers 
were referred to him. 

Hardly had the law of 1863 become operative before com- 
plainings were heard. A Committee on Public Expenditures 
reported incidentally in 1864 that "seizures had been made, 
penalties had been exacted seemingly severe and dispropor- 
tionate, but clearly within the provisions of the law made to 
protect the revenue." ^ Oue of the earliest noteworthy ca.ses 
occurred in Boston, in 1865, in which a champagne importing 
house, paid $100,000 to effect a settlement with the govern- 
ment. The government received one-half of this sum, and 
the other half was divided between the collector, and other 
officers concerned in the seizure. 

The procedure under the law was simple, summary, and 
severe. A person must give the information on which to 
base legal proceedings. A custom-house inspector might 
make an affidavit of suspicion that a merchant had im- 
ported goods without paying the duties legally chargeable 
thereon, and that the invoices, books, and papers relating to 
such importations were in a certain place, whereupon a district 
judge would issue his warrant, and, armed with this, the 
store would be invaded, aiid the books, papers, letters, etc., 
would be seized and carried to the custom-house with the hope 
of finding evidence of fraud from an examination of them. 

That such a procedure was a serious injury to the victim 

was evident. " He knows that his credit is injured, once it 

is whispered in Wall street that he is in difficulty with the 

custom-house ; he knows, too, that if the report of such an 

'House Report, No. Ill, 38 Cong., first session. 



1873.] COLLECTION OF THE CUSTOMS REVENUE. 501 

imbroglio gets abroad, Lis foreign credit is impaired, if not 
destroyed; he knows, too, that without the possession of his 
store, he cannot sell his goods and meet his paper ; he knows, 
too, that ^vithout his books and papers, he cannot arrange his 
balances or make his collections. In this garroting grip, 
therefore, often it is simply a question with him. Shall I give 
up a part and save something, or stand and contend, not with 
harpies of the law, not with the mere minions of office, but 
with the myrmidons of the government itself? Is it any 
wonder then, that, though conscious of no wrong, of perfect 
rectitude of intentions, when brought into the dissecting-room 
of the seizure bureau, he surceases opposition, allows the flesh 
pounds, blood and all, to be taken, and goes out, perchance, 
not a malcontent, but with new views of the laws and justice 
of the country." ' 

The seizures multiplied in number, and " revenue officers 
from habit became more fearless, if not less scrupulous in 
their proceedings." Yet the law remained in force. In 
1872 an investigating committee of the Senate plainly recom- 
mended that " moieties should not be allowed to officers of 
the customs, except in the case of smuggled goods seized. 
When goods are entered at the custom-house there should 
be no cheating in quantities or values. But the government 
should not bribe them to be defrauded by holding up to 
them great fortunes for detecting the fraud. The husband- 
man who pays his harvester a meagre salary for gathering 
grain, but offers him one-half for gleaning all that his own 
rake passes over, should not be surprised to learn that his 
servant rakes slovenly." ^ 

1 House Report, No. 30, 39 Cong., second session. 

* Senate Beport, No. 227, 42 Cong., second session. 



502 FINANCIAL HISTORY OF THE UNITED STATES. [1873. 

The informers, nevertheless, busily continued their work 
amid the increasing growls and lamentations of the importers. 
Congress looked on, the secretary of the treasury kept silent, 
the newspapers promptly announced the victims, and described 
the proceedings against them. In 1873 this singular business 
reached its height, when the long-established and honorable 
house of Phelps, Dodge & Company was attacked. The 
special agent of the treasury who conducted the proceedings 
was INIr. Jayne. The amount demanded of the firm was 
enormous. An explanation of the demand is worth giving, 
because it will show not only the uprightness of the firm in 
dealing with the government, but also the barbarous condition 
of the law which regulated the mode of importing. The law 
provided that duties on merchandise should be assessed on 
"the actual market value or wholesale price thereof at the 
period of exportation iu the principal markets of the country " 
whence imported. Another provision of the law declared 
that when the goods ANcre purchased and not simply consigned 
to a party in this country, the invoice accompanying the 
goods must declare their actual cost, which, though appai'ently 
a simple requirement, was in some cases a very difficult one, 
as will soon appear. At the time of this particular seizure, a 
ruling of the treasury department existed which increased the 
complexity of the importing business. All purchased goods 
must be entered at the custom-house at their actual cost Avhen 
that was higher than their market value at the time of ship- 
ment, but at their market value when that was higher than 
their actual cost. For many years the firm had been an 
enormous importer of tin, and in ascertaining its value gener- 
ally at the time of shipment at Liverpool no difficulty had 
occurred. From time to time, however, small quantities 



1873.] COLLECTION OF THE CUSTOMS REVENUE. 503 

■would be received at Liverpool, mostly extra and unusual 
sizes, in fulfillment of old orders, and to value these correctly 
was not easy M-ithout much delay in forwarding them. It ^\■as 
not difficult to ascertain their market price, but what was the 
contract price? These were usually the remnants of contracts 
delivered long after the time stipulated, and as a deduction 
when settling such contracts was probable, their actual cost 
was not fixed, but contingent. The representative of the firm 
at Liverpool met these difficulties by marking up the price of 
the items in an invoice whenever an advance had occurred 
between the time of buying and of shipping, and of fixing 
the price of the smaller items, thus shipped long after they 
were ordered, at their market price. Altliough it was shown 
during the investigation of this affair, that while the repre- 
sentative had, in a few instances, slightly valued items at less 
than their cost price, in far more instances, and for larger 
amounts, he had valued the goods sent above their cost and 
actual market valuation, so that, regarding the importations 
of the firm as one transaction, the treasury had received more 
than it could have demanded by any construction of the law, 
or regulations of the treasury department. 

An undervaluation, however slight, subjected an entire 
invoice to forfeiture,^ and as the invoices of the firm were often 
for large amounts, a few small departures from a correct valu- 

' Secretary Boutwell, in the annual treaiiury report for 1871, remarked : 
"One of the diiBculties which the department has to meet frequently 
is, that the customs officers have an interest in the proceedings for the dis- 
covery of fraud, the settlement of cases, or in the prosecution of them which 
is different from the real interest of the government, and as a necessary re- 
sult, the conduct of such officers is open to suspicion, both on the part of 
those who are pursued by them, and the government they ostensibly 
represent." 



504 FINANCIAL HISTORY OF THE UNITED STATES. [1873. 

ation resulted in rolling up a heavy bill against the concern. 
This may be seen, perhaps, more clearly by the following 
table of four invoices which fairly represented all the invoices 
during the period in controversy : 



'o 
n 


o 

.as 


g 

i 

1 


i 

1 
1 


a. 
2 

1 


Amount of duties 
on undervalua- 
tion. 


$20,365 00 
25,570 00 
20,035 00 
36,611 00 


$235 00 

1,301 25 

458 60 

1,350 60 


$23S 75 

1.341 00 

'458 60 

1,353 25 


$3 75 
39 75 


$4,073 00 
4,114 00 
4,007 00 
7,322 00 


$ 75 
7 95 










S102,581 00 


$3,354 25 


$3,391 50 


$43 50 


$19,616 00 


$8 70 



Mr. Dodge, the senior partner in the house, whose innocence 
was believed even by Mr. Jayne himself, narrated the history 
of the seizure before a committee of Congress. In conclud- 
ing his statement, he remarked : 1. That the total amount 
of importations by his house in the five years ending with 
1872 was $30,000,000. 2. That in a careful examination 
of these importations, some articles were found in different 
invoices which, it was claimed, were undervalued, and that 
the total amount of these was $1,750,000. 3. That the 
total amount of the articles claimed to be undervalued was 
$271,017.23. 4. That the total amount of the undervalu- 
ation claimed was $6,658.78. 5. That the total amount 
of duties claimed to be lost was $1,664.68. The deficiency 
in the amount of duty was so small compared with the 
enormous transactions of the firm, that only the most highly 
prone to suspect wrong-doing will imagine that the importers, 
in that case, ever intended to defraud the government. 



1873.] COLLECTION OF THE CUSTOMS REVENUE. 505 

" These facts," said Mr. Dodge, in his statement, " do not 
furnish the least evidence of intent to evade the customs law, 
especially when taken in connection with the fact that in one 
of these /ears we paid duties on overvaluation of our invoices 
of over §260,000, to make them equal to market value. Our 
error was in entering them at a fraction less than contract cost 
in trying to meet market-value, and that only to an extent so 
small compared with the large amount invoiced above cost as 
to preclude all idea of wrong intent." ^ 

This seizure finally awoke the country, and the law was 
repealed." The fruitfulness of this plum tree to the collectors 
can be best shown by figures : ' 

Hiram Barney received from April 8, 1861, to Sep. 4, 1864, §64,607.29 

Sept. 8, 1.S64, to Aug. 3, 1865, 55,014.55 

Sept. 1, 1865, to May 15, 1866, 33,166.94 

May 16, 1866, to Mar. 31, 1869, 102,710.13 

April 1, 1869, to July 20, 1870, 41,304.60 

July 21, 1870, to Nov. 30, 1871, 55,997.54 

Dec. 1, 1871, to Nov. 30, 1873, 56,120.21 



Simeon Draper 
Preston King 
Henry A. Smythe 
Moses H. GrinneU 
Thomas Murphy 
Chester A. ^ixthur 



If the collectors, in seeking to enrich themselves, as above 
described, vexed the souls of the importers, and covered the 
government with discredit, the minor officials of the govern- 
ment have enlarged their income in ways not less opposed 
to honesty and good governing. From an early period money 
has been paid as bribes to inspectors and appraisers to secure 
the passage of goods without paying duty, or less than the 
legal amount. In these cases the government has suffered, 

1 History of the Proceedings in the case of Phelps, Dodge & Co. 

' See Secretary Boutwell's letter on abolishing fines and moieties, Ex. 
Doc., No. 283, 41 Cong., second session. 

3 Jayne's testimony before the Committee of Ways and Means, Mis. Doc, 
No. 264, 43 Cong., first session. 



506 FINANCIAL HISTORY OF THE UNITED STATES. [ISTS. 

while the bribers and the bribed have been the gainers. In 
many of the investigations ordered by Congress, evidence 
has been adduced of these practices, especially by the Jay 
commission.^ Their second report showed that it -sVas a com- 
mon practice among entry clerks, weighers, gangers, inspectors, 
and storekeepers to receive from importers and brokers irregu- 
lar fees in the nature of bribes. This practice was a matter 
of general notoriety in the custom-house, nor did it " appear 
that any effort was made by the collector, naval officer, or 
surveyor to suppress it." ^ In investigating claims known as 
" charges and commission cases," the fact was disclosed that 
the clerks thus engaged in making up statements of refunds, 
received gratuities from attorneys. If this hasty peep into 
the work of the New-York Custom-house will not suffice, the 
luminous record of that institution is accessible to all.' 

In administering the revenue law, the officers of the govern- 
ment have encountered two other classes of difficulties of the 
gravest character, one class relating to a proper construction of 
the law, and the other to undervaluations. Some of the diffi- 
culties in construing the law will first be considered. 

It would be quite impossible to enact a tariff law so trans- 
parent that the wisest even could see through every portion. 
All laws are capable of different constructions. The law 
reports are filled with cases explaining the meaning of statutes. 
The mind of man is curious, and he can raise innumerable 
questions. Even the most familiar principles of common law 
are subject to daily modification. The numerous law reports 
containing the decisions of the courts are the record of the 

' Ex. Doc, No. 8, 45 Cong., first session. 

^ Secretary Sherman's letter to Pres. of U. S. Senate, Jan. 15, 1879. 

' See reports of inyestigating committees herein cited, and page 519. 



1873.] COLLECTION OF THE CUSTOMS REVENUE. 507 

doubtings and disputings of men concerning the law. The 
tariff is a highly complex law, and its meanuig can not always 
be easily gathered. Nevertheless, a swift mode of determining 
it has beeii provided, which may be briefly explained. The 
dnties of the customs officers, with respect to goods, are two- 
fold — (he determination of the particular class under wliich 
they are to be assessed, and the appraisal of them to determine 
their value. The valuing of them is done by the appraiser, 
and if that be satisfactory to the collector and the importer, 
the work is done ; if not satisfactory, the collector may order a 
re-appraisal if he thinks proper, or the importer, if dissatisfied, 
may claim a re-appraisal. The appeal is made to a merchant 
appraiser. He is suj)posed to be skilled in the article to be 
submitted to his decision. He is appointed by the collector, 
and one of the four general appraisers in the principal ports 
sits with him, and their decision on the value of the goods is 
decisive, if they agree. If they do not, the collector decides 
the matter, and his decision is final. From it the importer 
cannot appeal, either to the secretary, or to the courts. In 
classifying imports, the collector determines whether they are 
iron or steel, cotton or wool, or belong to a particular speci- 
fication under those or other heads. The work is usually done 
in the appraiser's office. The appraisers report to the collector 
the class to which the goods belong. He not knowing as many 
of the details as they, usually accepts their classification, and, 
if it be wrong, an appeal is taken from the collector to the 
secretary of the treasury. In doing this, a protest is first filed 
with the collector, stating, in a general way, that the importer 
is dissatisfied with the classification, how the goods were class- 
ified, and how they should be. If the collector declines to 
change it, the papers are sent to the secretary, and are referred 



508 FINANCIAL HISTORY OF THE UNITED STATES. [1873. 

to the customs division of the treasury department. If the 
question involved is one of routine (and most questions are) the 
chief of the division prepares an answer for the signature of 
the second assistant of the treasury to sign, who is charged 
with the supervision of the customs duties. If the question 
be doubtful, or a new one, the chief calls on the assistant sec- 
retary, and the two hold a consultation, after which the former 
prepares an answer for the signature of the other. If the 
question is thought very important, the assistant goes to the 
secretary, and the two consider tlie question. If they are in 
doubt, the opinion of the solicitor or the attorney-general is 
asked. Having formed an opinion, on the best advice he can 
obtain, the secretary renders his decision or answer. If he 
approves the action of the collector, the importer can bring a 
suit, if dissatisfied, within a fixed time for the determination of 
the question by the court. The decision thus rendered is final. 

The great multitude of questions that arise in the collectors' 
offices, and which go from them to the treasury department, 
stop with the answers rendered by the secretary, or his assist- 
ant. Nevertheless, the cases appealed to the courts are so 
numerous that au attempt has been made to establish a special 
tribunal or customs court to try them. Were this done, the 
federal courts would be relieved of that class of cases, and tlie 
differences between the importers and the government would 
be more speedily adjusted. The existing method, however, is 
expeditious, except appeals to the courts, and if officials were 
always competent and honest, some of the evils in administer- 
ing the law would disappear. 

Many questions, however, are so enmeshed in the law that 
it is difficult to extricate a satisfactory answer. Of course, 
when the secretary, or his assistant, renders a decision which 



1863.] COLLECTIOlSr OF THE CUSTOMS EEVENUE. 509 

is accepted, the path of the collectors is rendered easier. But 
when au appeal is taken to a court, and a jury at one time 
renders a decision one way, and a few weeks afterward, 
in a similar ease, decides differently, then what shall the 
collectors do "? Shall they follow the decision of the first jury, 
or that of the second ? If they follow the first until the second 
is rendered, and then follow that, suppose the next higher 
court shall reverse the decision in the second case, or suppose 
the supreme court shall finally reverse the decision of the 
court below"? This is one set of troubles for the collector. 
There is another, and more common set. A judge of the dis- 
trict court in New York will render a decision, and a judge in 
another district will render a different decision ; who is right ? ' 
And if the collector in each district follows the last decision 
rendered by the tribunal in his district until a decision is 
rendered by the supreme tribunal, the importers, in the mean- 
time, pay different rates of duty, and, therefore, some are able, 
through the uncertainty of the law, to obtain an advantage 
over others in selling their goods. 

These difficulties may be shown in a few of the many eases. 
The ordinary reader would suppose that the question whether 
a custom article was iron or steel might be settled without 
difficulty. Different rates of duty have been imposed on the 
two metals, and hence the necessity of answering the question. 
A lawsuit, la-sting several weeks, was tried in Boston in 
1882, involving that question, and, notwithstanding all the 
evidence offered, and the skill employed to ascertain the truth, 
the result was not accepted as conclusive by the defeated 
party. The cotton-tie controversy has been one of the most 
important under the tariff law. The law prescribed a mucih 
' Testimony of Assistant Secretary French before the Tariff Commission. 



510 FINANCIAL HISTORY OF THE UNITED STATES. [1878. 

higher rate for hoop-iron than for manufactures of iron. The 
cotton-tie was a piece of hoop-iron eleven feet long, and, at 
first, with a buckle riveted to one end. That ^vas classed as a 
manufacture of iron, and subjected to thirty-five per cent duty. 
The treasury department so ruled, and was afterward sustained 
by a jury. Then the importers found there was no need of 
riveting on the buckle, and the hoops were sent in packages, 
and the buckles were strung together. Then the manufac- 
turers claimed that the article thus imported was hoop-iron. 
The treasury department finally decided that a cotton-tie which 
had not a buckle on it was hoop-iron, and should bear the 
higher duty imposed on that article. An equally vexatious 
question arose over cut hoops with holes punched for rivets. 
The department, at first, ruled that this was hoop-iron. An 
appeal was taken to the court, and these cases were tried by 
the jury. In the first, they found a verdict for the importer, 
but it ^\'as set aside ; in the second case they disagreed ; iu the 
third, they found a verdict for the importer. The govern- 
ment acquiesced in the decision until 1878, when Mr. Sher- 
man, ^\■ho was secretary of the treasury, sent a communication 
to Congress, announcing that he was reconsidering the question, 
and should reverse the decision of the third jury if no legis- 
lation was had on the subject. He did so, thus subjecting the 
hoops to the duty on hoop-iron. When this treasury decision 
was made, importers came immediately to Congress, and to 
the treasury department, and said, " We were misled by this 
decision of the department, and have invested our money, and 
our merchandise is on the way. We are willing to pay the 
duty fixed by the department when we ordered the goods, but 
we are not willing to pay three times as large an amount, and 
will not do it." Congress listened, and granted relief on all 



1880.] COLLECTION OF THE CUSTOMS KEVENUE. 511 

importations covering a certain period. The Standard Oil 
Company was the lieaviest importer. 

Otlier (juestions arose over a section of the tariff prescribing 
the duty on articles of which silk was " the component mate- 
rial of chief value." The appraisers and examiners had great 
difficulty in determining the actual proportions found in such an 
article. ^loreover, what did the words "chief value" mean? 
Must the article be more than half silk, or must silk be only 
more than either of the other components, to come under that 
designation? A section of the law in operation before 1883 
contained a proviso that it " should not apply to merchandise 
which had as a component material twenty-five per centum or 
over in value of cotton." Under that section the question 
arose whether a certain article had more than twenty-five per 
cent in value of cotton in it. The question ^vas given to 
experts. They said if Sea Island cotton M^ere used, there was 
more than twenty-five per cent in it ; if common cotton, less 
than that amount, but " nobody can determine whether it is 
Sea Island cotton or not." 

Ambiguities were created by using terms too loosely. "Goods 
of a like description," and " goods for similar use," were_traps 
wherein many an importer was caught. What did they mean — 
similarity of use, similarity of structure in the weaving, simi- 
larity of materials, or some other? This ambiguity ran through 
the warp of the cotton tariff. Another kind of ambiguity arose 
by so describing articles as to put them under different classes. 

These difficulties, occasioned through lack of wisdom, were 
numerous and bad enough, yet were not the worst. New ar- 
ticles were constantly made and imported, and many a vexa- 
tious question arose as to classifying them. In many cases 
they were produced in order to evade the duties imposed by 



512 FINANCIAL HISTORY OP THE UNITED STATES. [1880. 

the law, or to slip through at lower rates. For example, the 
law enacted that nickel should be assessed at thirty cents a 
pound, and nickel alloy at two-thirds that rate. Importers 
accordingly combined copper with the nickel in order to evade 
the higher duty. At first, the combination contained about 
fifty per cent of copper ; finding that the fraud worked well, 
importers grew bolder and imported an article containing 
ninety-five per cent of nickel and five per cent of copper.-' 
Though no one doubted that the object of the combination was 
to defeat the law, the treasury department could find no rem- 
edy ; for had not the Supreme Court of the United States de- 
cided tliat if importers colored sugar artificially for the purpose 
of lessening the duty, they had a right to do so. The duty on 
sugar was determined by color, instead of saccharine strength, 
and by coloring it with black molasses in a vacuum pan, sugar 
of the highest quality was reduced to the lowest and was as- 
sessed, therefore, for only the smallest duty.^ But yet the law 
was not always successfully evaded by the importer. One 
section provided that all machinery composed in part of iron 
and steel should be subjected to the higher steel duty. An 
individual imported a valuable machine made wholly of iron, 
except a small steel spring. That spring proved a very costly 
accompaniment, for by this was the classification determined. 

Having now shown the principal difficulties in classifying 
dutiable goods, we shall consider some of the difficulties 
encountered in ascertaining the correct valuation on which 
the duty is assessed. With honest importers, of course, no 
difficulty exists. Unhappily, very many importers are not of 

' The Duty on Nickel, by Joseph Wharton. 

' For effects of the Hawaii treaty on sugar interests, see H. A. Brown's 
Concise E&um^ of Sugar Tariff Topics. 



1884.] COLLECTION OF THE CUSTOMS REVENUE. 513 

this type, and the practices to which they have resorted in 
order to reduce the assessable valuation would require volumes 
to describe. " The ingenuity and depravity alike of the Old 
World and our own have been ceaselessly employed in devising 
means and perfecting plans for defrauding our revenues and 
evading our customs laws. There is scarcely any kind or 
description of merchandise subject to ad valorem dut}-, im- 
ported into this country from beyond the seas,, but has been 
or is being undervalued, more or less." ^ 

The practice of undervaluing has been increasing, especially 
since the repeal of the moiety Act in 1874, by which the gov- 
ernment has since withheld the power really to punish fraud 
when discovered. The custom-house records at our principal 
ports show numberless instances where invoice values have 
been advanced by local appraisers ten, twenty, thirty per cent, 
in order to reach the market value of the goods assessed, and 
such advances have been sustained by reappraising boards 
wlien appeals have been taken. An undervaluation of two 
hundred per cent, or even one-tentli of that amount, presup- 
poses fraud, and often the circumstances attending slighter 
undervaluations are such as to convince the custom-house 
officers of the fraudulent intent of the importer. By the law 
repealing the moiety Act, it is practically out of the question 
to forfeit the goods, impose a fine, or punish the guilty parties, 
for where the fraud is proved, in order to recover and secure 
the punishment of the offenders, the fact must be established 
as a separate proposition, not only that the act or omission 
was intentional, but that it was done or omitted with intent 
to defraud the revenue, which ordinarily is rendered almost 

^ Mr. Tichenor, special agent of the Treas. Department, Tariff Commis- 
sion, p. 2469. 

33 



514 FINANCIAL HISTORY OF THE UNITED STATES. [1884. 

impossible by the inability of the officers of the government 
to seize or to gain access to the offender's books and papers. 
If it is proved that a man of sound mind has violated any 
other law beside this, it is presumed that he did so with the 
intention of violating it. Under this statute, though the 
evidence be conclusive of the importer's disregard or violation 
of the law for the purpose of gain, the government must prove 
that he did so with intent to defraud the revenue, which 
involves the necessity of proving that he had a full knowledge 
of the law, a requirement which can rarely be fulfilled.^ 

Congress, when moved by the unwise administration of the 
moiety law of 1863, went too far in shielding wrong-doers, 
and they are now vigorously flourishing the painful evidence of 
the weakness of our government to enforce its laws. In view 
of the recent history of the administration of the revenue laws, 
the remarks of a committee of Congress in 1872 are not out of 
place here. "If, in spite of all the vigilance and fidelity that 
can be secured in the custom-house, frauds are perpetrated, 
other agents of the government should be stimulated to ferret 
them out and expose them, and if they do not always uncover 
their heads while investigating such alleged frauds, as it is com- 
plained some of the special agents of the treasury do not, it 
is probably better to tolerate even that outrage upon good 
manners rather than allow the frauds to go on unprevented." ^ 

The most general mode of undervaluing is effected by 
consigning foreign goods to agents in this country. By re- 
sorting to this method, the a\'cnuc of information relating to 
the market value of such goods in the country of production 
is closed. It is the practice of many manufacturers and ship- 

■" Tariff Commission, p. 2469. 

' Senate Eeport, No. 227, 42 Cong., second session. 



1884.] COLLECTION OF THE CUSTOMS EEVENUE. 515 

pers thus consigning their goods, to make them of such a 
width or style from those in the home market as to render 
identification for vahiation not easy. For a long period 
extensive importers have been unable in a regular way to 
purchase abroad many of the most important articles of mer- 
chandise made there, and have been obliged to buy them, to 
be delivered through commission agents in this country, at 
the dollar price, duty paid. This mode is becoming more and 
more general, and its disastrous effects both on the revenue and 
the legitimate importing trade are becoming more marked 
every year. There are in New York, especially, numerous 
commission agents, who, in order to secure business, advise 
and urge foreign manufacturers to undervalue their consign- 
ments to them. In a large number of ca^es the goods are 
" declared for duty," at and below the cost of manufacture. 
Xot long ago, a foreign manufacturer confessed that he had 
undervalued, for four years, consignments of silk ribbons to a 
company of commission agents at New York, on an average 
of twenty per cent. Not accounting to him for any profits, he 
failed, and afterward committed suicide. The commission 
agents have flourished mightily. 

These frauds have been practiced more easily by sending 
all the goods of a particular class to a single port, where 
they were appraised by one person. Vast lines of goods have 
been entered at the port of New York only, and have been 
examined, aj^praised, and passed by a particular examiner, 
who, if incompetent, careless, unfaithful, or corrupt, could 
injure the revenue and legitimate trade beyond measure with- 
out detection.^ 

' This practice of undervaluing has become so universal that even the 
shopkeepers of continental Europe voluntarily tender American buyers of 



516 FINANCIAL HISTORY OF THE UNITED STATES. [1884. 

The practice of undervaluing and fictitious invoicing has 
prevailed to a much greater extent on the continent of Europe 
than in Great Britain or Ireland. One reason given for the 
varying practice is the existence of a higher business code in 
Great Britain than in European countries. A. better reason 
probably is that the declarations to consular invoices in Great 
Britain are made under oath before an officer regularly author- 
ized to administer it, and " forging is punishable and is pun- 
ished as a crime under the English law, while on the continent 
such declarations are merely made before one consular officer, 
and are regarded as perfuoctory proceedings without solemnity, 
and carrying no legal nor moral responsibility." A deeper 
reason might be found in the moral sentiment of the English 
than of the Latins, the former, in their religious education, 
having been taught to regard oaths, while the latter have been 
taught to consider them lightly because they are the require- 
ment of a secular power. 

Turning now to frauds in particular kinds of goods, we 
may first mention silk fabrics. Those imported have been 
generally made especially for the American market, and have 
varied to such an extent in width and other respects as to 
prevent their identification with goods of the same classes 
made for the home and European markets, and as they were 
not sold at all, nor any samples were given for quotations, and 
all were consigned to or through their agents in this country, 
the avenues to a knowledge of their value in Europe were 
effectually closed. The Swiss silks were undervalued "at 

small and large articles invoices specially made for the customers. The 
European " manufacturers and others of fair reputation in their commu- 
nities " defend themselves on the ground that our tariff is so "wicked, un- 
friendly, and tyrannical, that it is their duty to evade it." 



1884.] COLLECTION OF THE CUSTOMS EEVENTTE. 517 

least twenty per cent, and French silks from ten to thirty per 
cent, and tliis was necessary to enable them to compete with 
American-made goods." 

In 1883 and previously, many wools were invoiced below 
six pence per pound to escape paying only the lowest duty 
prescribed by law. The mode of evading the tariff on wool 
was easy. An American buyer might offer a dealer, or com- 
mission merchant at Liverpool, or elsewhere, five and seven- 
eighths pence per pound, excluding all charges and commis- 
sions, and the transaction was ostensibly made on that basis ; 
but in reality, if the wool were worth six and a half pence, the 
charges and commissions would be swelled so that the seller 
would actually realize his six and a half pence per pound, 
and the importer, entering the wool at five and seven-eighths 
pence, would pay only three cents per pound duty. A 
special agent of the treasury said that he had been astonished 
to find so large a proportion of wool invoiced at five and 
seven-eighths pence per pound, and to observe such generous 
charges for cartage, baling, exchange, and the brokerage and 
commissions charged as high as five per cent, when the usual 
rate was only two per cent. To make the low price more 
deceptive, the invoices often would be prepared ostensibly at 
points far inland. Wool, for example, grown in the Province 
of Georgia, Asiatic Russia, would be sold at Marseilles, France, 
the agreement stating that the invoices should be furnislied 
and certified at such points as Tiflis, or Poti, in the country 
of production, at prices low enough to secure its admission 
into the United States on payment of the lowest rate of duty. 

In undervaluing, the importer has had two objects ; one was 
to make the aggregate valuation, on which he must pay, as 
low as possible, and, also, as just mentioned with respect to 



518 FINANCIAL HISTOEY OF THE UNITED STATES. [1884. 

wool, to reduce the price sufficiently to render the goods 
accessible at a very low rate of duty. For example, if certain 
goods were worth less than twenty cents a square yard in 
value one rate was paid, but if worth more, the rate was 
fifteen per cent higher. If one merchant could succeed in 
keeping his goods invoiced below that line, and his competitor 
could not, the former would have a great advantage. A prac- 
tice has grown up among those who go to Europe to buy 
illustrating another phase of these eiforts' to invoice within 
certain rates in order to escape higher duties. The buyer will 
say to the foreign manufacturer, " I want to buy a line of 
cashmeres, for example, and shall want four thousand or five 
thousand pieces in all. I want, say, five hundred pieces of 
the lower grades, and so on up into the finer goods. What 
are your prices ? " The negotiation is conducted on the basis 
of the sale of the whole line, and if made, it is understood 
that all goods below a certain amount must be at a price 
which will permit their entry into the United States at the 
low rate of duty. The sale is not based on their value, and the 
manilfacturer repays himself on the finer qualities sold. If 
the purchaser went to buy the low grades on their merits, he 
could not import them at the low rate of duty. The conse- 
quence is that the man who goes abroad to buy only the lower 
lines of goods, and buys them on their intrinsic value, is 
compelled to pay the higher rate of duty, and he who resorts 
to the other method of buying the goods succeeds in getting 
them at the lower rate of duty.' 

These frauds are, doubtless, effected in many cases through the 
assistance of some of the officials at the custom-house. Detec- 
tion is difficult. Foreigners now control the business, either 
'TariiF Commission, p. i!4j0. 



1873.] COLLECTION OF THE CUSTOMS REVENUE. 519 

the agents of foreign houses, or others, who make their for- 
tunes, and then return to the Old World to enjoy them. They 
are not interested iu our country, nor its institutions, nor its 
prosperity. They regard themselves as adventurers, who are 
stopping here only for a short season. Our country, to them, 
is like the sea to a fisherman. Living here temporarily with 
these sentiments, what reason have we for supposing they will 
not make all they can, or that they will serve us better 
and at lower prices than those of our own kin? If they 
undervalue and cheat the government in order to enhance 
their gains,' will they not, for the same reason, overvalue 
when selling to the consumer? Will they be animated by 
an;yjiigher principle when dealing with Americans than with 
the American government ? 

Such is the latest thing seen in the administration of the 

'In 1863, Mr. Jordan, solicitor of the treasury, investigated into the 
frauds committed against the government by the officers of the custom-house 
in New Yorlj, and in his report, he said : " As to the accessibility of many 
of those employed in the custom-house to corrupt influences, the evidence 
is conclusive and startling. . . . The statements herewith submitted seem 
to justify the belief that nearly the entire body of subordinate ofiicers, in 
and about the custom-house are, in one way or another, in the habitual 
receipt of emoluments from importers or their agents. One lawyer de- 
clares that he has paid to a single record clerk the sum of one thousand 
eight hundred dollars within a period of fifteen months. Entries from the 
books of an importing house, doing but a moderate business, are discovered, 
showing that about a thousand dollars had been paid by it to an examiner 
within a period of a year. It is shown that a bond clerk, with a salary of 
one thousand dollars per annum, enters upon a term of eight years with 
nothing, and leaves it with a fortune of thirty thousand dollars. A 
majority of the officials questioned on the subject by me, admit that they 
receive such emoluments to a greater or less amount." House Mis. Doc., 
No. 18, 37 Cong., third session. 



520 FINANCIAL HISTORY OF THE UNITED STATES. [ISTS. 

customs-revenue law. If now the historical kaleidoscope be 
turned a little backward, something else may be seen worthy 
of notice. Ever since the enacting of a tariff law the remis- 
sion of duties, for one reason or another, has occurred. Some- 
times this has been done by the secretary of the treasury, by 
authority granted to him under general laws, and sometimes 
Congress has exercised this authority in special cases. After 
the great fire at Portland, Maine, in 1866, a bill was passed 
remitting duties on all materials except lumber that should be 
used for a year in rebuilding the city, and a similar Act was 
passed to aid the sufferers of Chicago after the fire of 1871. 
The constitution declares that " no preference shall be given 
by any regulation of commerce or revenue to the "parts of one 
State over those of another ; " and also, that " all duties, 
imports, and excises shall be uniform throughout the United 
States." When the bills for the relief of Portland and 
Chicago were passed, the calamities were unparalleled in our 
country, and the relief desired was granted without a thought 
of the constitutional principles involved. When the Boston 
fire occurred in November, 1872, a similar bill was intro- 
duced into the Senate, which, however, was declared to be 
unconstitution al . 

" If this bill be constitutional," remarked Senator Carpen- 
ter, in his report, " then a similar bill in relation to any or all 
other imported articles would also be constitutional. If build- 
ing-materials, or other articles imported into the United States 
at any port, to be used in Boston, may be free of duty, then 
the provisions of the bill might be extended to articles to be 
used in the State of INIassachusetts, or all New England. And 
a law which should provide that all hides imported into the 
United States, and manufactured into leather in New England, 



1884.] COLLECTION OF THE CUSTOMS EEVENDE. 52l 

and all wool imported into the United States, and manufac- 
tured into yarn or cloth in New England, should be exempted 
from duties otherwise imposed, would be constitutional. The 
fact that a calamity by fire cannot be distinguished from one 
produced by a flood, a hurricane, or earthquake, or any other 
visitation outside of the ordinary course of things, and the fact 
that if Congress attempts to insure against one, it must against 
all, not only justifies, but calls for a reconsideration of the 
subject, and makes it necessary to. determine the principles to 
be applied in all such cases. If, in view of all these consider- 
ations. Congress shall pass this bill, it is not perceived by 
your committee upon what ground Congress should refuse 
relief to individual sufferers. How many buildings must be 
destroyed to justify the interference of Congress ? ]\Iust there 
be a thousand, or five hundred, or one hundred, or fifty, or five ? 
Where is the line to be drawn ? Must not Congress become 
the great almoner of the nation — a great insurance company 
for forty millions of people ? " Senators Edmunds and Wright 
presented a minority report, but Senator Carpenter's reasoning 
was unanswerable and convincing. 

Whoever shall read this account of the administration of the 
customs-revenue law, may perhaps ask, Ought not a system 
which is the cause of so much wrong-doing to be smitten down? 
This question may be answered by asking another. If gov- 
ernment is essential for man, taxation is necessary to support 
government ; and is a better system practicable ? We have 
seen how vigorous was the denunciation against the income 
tax, and also against other features of the internal revenue sys- 
tem. We have caught glimpses of the enormous frauds per- 
petrated in collecting the taxes on whiskey and tobacco, which 
are universally regarded as the best objects of taxation. And 



522 PINAJS'CIAL HISTORY OF THE UNITED STATES. [1884. 

the proof is abundant that the State and municipal systems of 
taxation are the cause of more bitter complainings and corrup- 
tion than attend the administration of the customs-revenue law. 
Mr. Wells's investigations into the system ,of taxation in New 
York, and those subsequently made by others in various 
places, show that thousands of millions of wealth, and rights to 
wealth, which are taxable by law escape taxation. Bad, there- 
fore, as the customs-revenue law is, the State and municipal 
systems cause far worse public and personal degradation. The 
story of the inequality and iniquity of local taxation has not 
been half told. Those having the most wealth, and especially 
in the large cities, and who ought to pay the heaviest taxes, are 
the must watchful, and too often escape with paying only a 
small portion of what they would pay if faithfully complying 
with the law. Whoever supposes that the moral and economic 
wrongs issuing from the customs-revenue law, regarded in 
their entirety, are worse than those issuing from any other tax 
system, will, if candid and intelligent, correct that supposition 
by studying the methods now prevailing of getting money to 
sustain the State and municipal governments of our Union. 



1884.] GOVERNMENT ACCOUNTING. 523 



CHAPTER IX. 

GOVEENMENT ACCOUNTING. 

The familiar complaint that " too much red tape " is used 
in the treasury department at Washington is not born of rea- 
son. Elaborate processes for receiving and paying money are 
employed to guard against fraud, and their effectiveness has 
fully justified their employment. 

The only way of getting money legally from the govern- 
ment is by Congressional approi^riation. When appropria- 
tions are thus made, they are entered in the books of the 
United-States treasurer. The secretary of the treasury then 
issues appropriation warrants directed to the heads of the 
other departments, informing them of the action of Congress. 
A warrant, for example, is issued to the secretary of war, in- 
forming him that Congress has appropriated a specific sum of 
money to pay the army, for quartermaster's stores, subsistence 
supplies, etc., and which he may draw for these purposes. 
This appropriation warrant, before reaching the secretary of 
war, is sent to the first comptroller, by whom it is counter- 
signed, and the appropriations are entered in books kept in 
his office ; then to the register of the treasury, where the ap- 
propriations are taken up and the warrant is registered ; and 
after that to the second comptroller and the proper auditor of 
the war department. Then the warrant reaches the war de- 
partment and goes to the different bureaus. Each bureau in 



524 PINANCIAL HISTORY OF THE UNITED STATES. [1884, 

turn makes entry of the appropriations granted to it, for each 
must afterward examine these entries and be limited by them 
when requisitions are made for money. 

When money is wanted to pay a disbursing officer, the sec- 
retary of war makes a requisition over his signature on the 
secretary of the treasury for the amount payable to such offi- 
cer. The requisition goes to the second comptroller, who 
signs it ; afterward to the proper auditor of the war depart- 
ment, who does likewise ; and then it passes to the warrant 
office of the treasury department, where it is filed. At this 
office a warrant is issued, signed by the secretary of the trea-s- 
ury, which is sent to the first comptroller, who records and 
countersigns it, and sends it to the register, by whom it is en- 
tered and registered and sent to the United-States treasurer, 
who, in turn, issues a draft for the required amount, payable 
to the officer in whose favor the original requisition was drawn. 

With respect to a claim for a service, stores, supplies, etc., 
it is filed in the bureau of the war department, which received 
the property, or for which the service was rendered. In this 
place the claim is investigated and reported to the auditor on 
whose books the class of appropriations for services or prop- 
erty of this nature is carried. The auditor examines it, and 
also the evidence accompanying it, and if found to be correct 
and a just demand against the government, the claim, with a 
statement of the account and evidence, is sent to the comp- 
troller, in whose office it is to be reviewed and passed. If the 
comptroller approves the finding of the auditor and bureau 
officer, he signs the statement of account made by the auditor, 
and certifies that it is correct, returns it to the auditor, by 
whom it is sent to the secretary of war for his requisition for 
payment. After entering it, the secretary of war makes his 



1867.] GOVEKNJIENT ACCOUNTIXG. 525 

requisition on the secretary of the treasury in the same man- 
ner as above described, except that the requisition is in favor 
of the claimant.' 

If a claim has not gone through the regular order, or has 
been delayed for some reason, and an application is made by 
the claimant, or his attorney, for settlement, the auditor re- 
ports thereon, and the comptroller decides it, and both sign and 
send to the secretary of war a settlement certificate, calling for 
a requisition to pay the amount allowed by them. This cer- 
tificate is referred to the projjer bureau of the war department 
for a report on the claim, and sometimes an adverse decision 
is rendered. Then further action is necessary, but the precise 
boundary of authority between the several departments and 
the treasury department in such a case was not clearly settled 
until a very recent period. 

In the beginning it was maintained that the President, 
having authority "to take care that the laws be faithfully 
executed," might control the action of the heads of the 
departments and other officers on questions of law and fact 
concerning claims. Such authority, it was decided at an 
early day, he did not possess." But the heads of the depart- 
ments have authority "to interfere with the action of the 
accounting officers [who are the auditors and comptrollers of 
the treasury department] upon accounts arising within their 
respective departments."^ Although the boundary of au- 
thority between the departments was undefined for many 

1 See House Eeport, No. 87, 42 Cong., third session. 

^ " The President had nothing to do with the settlement of public 
accounts." Attorney-general Wirt in Anderson's case, 1 Opinions of 
Attorneys-general, p. 678. 

» 5 Ibid., p. 630. 



526 FINANCIAL HISTORY OF THE UNITED STATES. [1868. 

years, no serious conflict arose until tlie administration of 
Mr. Stanton as secretary of war. In September, 1866, the 
attorney-general gave an opinion " that he had authority 
to withhold his signature from a requisition for an amount 
which he believed to be not properly due, though certified 
to by the accounting officers of the treasury department." 
Mr. Stanton complained that war claims, or claims for army 
supplies allowed by the quartermaster-general, were " largely 
increased by the accounting officers of the treasury, and sums 
allowed which, in the judgment of the chief of the quarter- 
master's department, were not honest nor just." Fortified 
by the attorney's-general opinion, Mr. Stanton declined to 
make a requisition for more than appeared to be due "by 
the report of the quartermaster-general, or the facts in the 
case," leaving the claimant to pursue his remedy for the 
residue before the court of claims or Congress.^ 

Thus the issue respecting the authority of the accounting 
officers of the treasury department, and that of the secretary 
of war, to determine claims was sharply raised, the former 
contending that their decisions were conclusive, the latter that 
they were not, " only to the extent that no more could be 
paid than was allowed by the accounting officers." Congress 
finally settled the conflict by declaring that the heads of the 
departments had not authority to change or modify the bal- 
ances certified to them by the commissioner of customs, or the 
comptrollers of the treasury ; on the other hand, tliese must 
be considered as final and conclusive on the executive branch 
of the government, and be subject to revision only by Con- 
gress, or the proper courts.^ The law contained a proviso that 

' Ex. Doc, No. 46, 40 Cong., second session. 
' Act, March 30, 1S68, 40 Cong., second session. 



1868.] GOVERNMENT ACCOUNTING. 527 

the head of the proper department, before signing a warrant 
for any balance, might submit facts which, in his judgment, 
affected the correctness of the balance, but the decision of the 
comptroller thereon in all cases should be final and conclusive. 
Congress soon after empowered the heads of departments to 
send any controverted claim exceeding three thousand dollars 
to the Court of Claims for adjudication.' 

The war department continued restive. The secretary 
believed that the accounting officers were not thoroughly sift- 
ing fraudulent from honest claims, and, distinguishing between 
accounts and claims, he tried to maintain absolute authority 
in settling the former. The term account was applied to 
papers and records which described the responsibility for 
moneys and property entrusted to an individual, and claim to 
a written demand by an individual or community for services 
rendered, or supplies furnished. He was not successful in 
maintaining the distinction. The secretary of war next tried 
to have all disputed claims, without regard to the amount, 
sent to the Court of Claims, but Congress took no further 
action. Authority to determine claims must be fixed, and 
fitly belongs to the accounting officers of the treasury depart- 
ment ; if not properly exercised, the remedy obviously is not 
to transfer their authority to the war or any other department, 
but to transfer them beyond the pale of government employ- 
ment. 

Another conflict of a graver kind has existed from an 
early period between the legislative and executive departments 
of the government, concerning expenditures. Congress en- 
deavored to restrict the public expenditures by the depart- 
ments, and they, on the other hand, to retain the largest 
' Act, June 25, 1868, 40 Cong., second session, sec. 7. 



528 FINANCIAL HISTORY OF THE UNITED STATES. [1870. 

control possible over them. The checks have been generally 
applied by Congress in the appropriation la^vs, though some- 
times in separate ones. In 1795, Congress enacted .that the 
unexpended balances should be carried to the surplus fund, 
and, in 1820, reminded the departments of their duty by re- 
enacting the law. In one way and another, however, these 
laws were evaded, and some exceptions were made of transfers 
by the President.^ From the time of the fii'st enactment to 
the present, said a Committee on Appropriations in 1868, a 
continual struggle had been going on by the several executive 
departments to escape control by Congress, while that body 
had as constantly endeavored to hold the executive to specific 
expenditures under specific appropriations. This struggle 
might be traced on the statute book in eleven enactments, 
beginning in 1817, and continuing until 1860, Congress either 
limiting, regulating, or extending the power of the President 
to transfer money from one object of appropriation to another, 
as the influence of the executive waxed or waned.^ 

In 1870, Congress enacted that all balances of appropria- 
tions contained in the annual appropriation bills, and made 
specifically for the service of any fiscal year, and remaining 
unexpended at the end of it, could be applied only to the 
payment of expenses properly incurred during that period, 
and the balances not thus needed must be carried to the 
surplus fund.' This law, however, did not touch permanent 
appropriations. It was also enacted at the same time, that all 
balances of appropriations, against which no requisitions had 

' See former vol., Book 1, chap, x., and p. 606. 

'^ House -Eeport on Custody and Expenditure of Public Moneys, No. 14, 
40 Cong., second session. 

' July 12, 41 Cong., second session, sees. 5, 6, 7. 



1870.] GOVERNMENT ACCOUNTING. 529 

beeu drawn for two years, should be reported by the secretary 
of the treasury to the auditor of the treasury, and that he 
should examine the books of his office, and certify to the 
secretary whether the balances would be required to settle 
accounts then pending, and all that would not be were to go 
to the surplus fund, regardless of the wish of the head of the 
department for which they had been made. Moreover, no 
department could expend more money during the fiscal year 
than Congress had appropriated for it, or involve the govern- 
ment in a contract for the future payment of money in excess 
of the appropriation therefor.^ 

This was wise legislation, surely ; but had not Congress long 
before declared that unexpended balances should be carried to 
the surplus fund, thus putting them beyond the reach of the 
departments, unless they were re-appropriated ? Yet this very 
thing was quite generally done, and even when it was not, the 
departments for many years carried over the unexpended bal- 
ances of appropriations from one year to another to the credit 
of their particular funds or appropriations.^ Hence, Congress 
might appropriate an adequate sum for transportation, yet a 
much larger sum might be expended by adding thereto the 
balance of an old appropriation. In consequence of the exist- 
ence of these unexpended balances, it was not easy for Congress 
to decide how much to appropriate from year to year. The 
balance of unexpended appropriations on the 30th of June, 
1869, was $102,390,159, and of this sum $41,548,477 were 
for the war department, and $26,532,453 for the interior 
department, or more than two }'ears' appropriations for each 

' Wood's case, 1 U. S. First Comptroller's Decisions, p. 1. 
^ See report of Secretary Thompson on expenditures in the navy depart- 
ment, Ex. Doc., No. 3, 45 Cong., first session. 

34 



530 FINANCIAL HISTORY OF THE UNITED STATES. [1874. 

of them.' Indeed, their balances were nearly as large as the 
entire appropriations for the fiscal year, thus giving the depart- 
ments two years' supplies for one. When the New-York post- 
office was begun, the money was drawn from an appropriation 
ten years old. The law of 1870, it was supposed, would 
remedy these evils, but by making the smallest settlement 
under an appropriation, it could be kept alive two years longer. 
Thus, the law proved ineffective. Accordingly, in 1874, 
Congress again attempted to correct the evil by enacting " that 
annually, after the first day of July, the secretary of the 
treasury should cause all unexpended balances of appropria- 
tions remaining on the books of the treasury for two fiscal 
years to be carried to the surplus fund and covered into the 
treasury, except permanent specific appropriations, and those 
for rivers and harbors, lighthouses, fortifications, public build- 
ings, pay of the navy and marine corps." This law no depart- 
ment has yet been able to surmount or tear down. 

Another practice, and far worse than the one just described, 
was the transferring of appropriations from one head of 

^ The following details, which are taken from the statement of the secre- 
tary of the treasury on Unexpended Balances to the speaker of the House, 
February 21, 1870, may render the text clearer : — 



HEADS OF APPE0PEIATI0N8. 



Balances on June 
30, 1869. 



Appropriations for 

fiscal year ending 

June 30, 1870. 



War 

War, civil, (public buildings and grounds) 

Navy 

Interior, (pensions and Indians) . . . . 
Interior, civil, (lauds, courts,) etc. . . . 

Diplomatic, (State department) 

Customs, (treasury department) . . . . 
Treasury department and miscellaueous 
Public debt, (treasury department) . . . 
Internal revenue, (treasury department) 



$41,648,477 

478,204 

10,007,164 

26,532,453 

3,.'")7(;,fl54 
l,0i;3,400 

2,;!iu,4(n 

'j,r,r,i f,.-,i 

i;ti,.Wi 

1,132,804 



$102,390,154 



$54,708,705 

7,180 

15,807,431 

10,11111,400 

4,331,972 

1,111,S34 

S,r,4S,868 

18,127,124 

8,699,400 



$110,903,904 



1878.] GOVERNMENT ACCOUNTING. 531 

expenditure to another. The constitution provides that no 
money shall be drawn from the treasury but in consequence 
of appropriations made by law. This provision has been 
evaded from the early days of the government until recently, 
under various pretexts. Elsewhere we have traced the history 
of these transfers.' In 1868 Congress repealed all laws of this 
nature, and enacted that no money appropriated thereafter 
should be diverted from its specified purpose. Nevertheless, 
the very next year, Mr. Robeson, the secretary of the navy, 
without making his intention known to Congress or the 
country, began to rebuild the navy, relying on the unexpended 
balances which had accumulated in the navy department. He 
forgot that Congress had legislated on the subject ; having 
discovered his blunder he abandoned his ambitious and, 
doubtless, well-meant designs. Had no action been taken by 
Congrass it is highly probable that Dolphins would have been 
sporting in many a sea, to the delight of our worthy naval 
officers, whose pride in their country can in no way be raised 
by commanding vessels so poorly representing our national 
aspirations. 

In 1872 Congress enacted a law concerning the proceeds of 
the sales of public property, worth mentioning in this place. 
Before that time, when property was sold by a department, no 
regulation existed respecting the proceeds. Enormous sales 
were made by the war and navy departments after the close 
of the war, of property which had become useless or too 
expensive to keep. Large sums, also, were realized from 
captured and abandoned property. Tliey came into possession 
of very large funds, disengaged from any use whatever, which 
could be expended as the departments pleased. Congress 
^ See former vol., pp. 190, 533. 



532 FINANCIAL HISTORY OF THE UNITED STATES. [1876. 

enacted that all proceeds of sales of old material, condemned 
stores, and other public property, with a few exceptions, should 
be covered into the treasury.' 

One or two more matters require to be briefly noticed. 
Though the treasury department is effectively organized for 
examining the ordinary demands on the government, it can 
not well determine the justness of a claim long due or pre- 
sented on ex parte evidence, for the accounting officers possess 
no means to call witnesses or cross-examine them, or to test 
the sufficiency of their testimony or its credibility. To pre- 
vent dangerous claimants from imposing on the government, 
the heads of departments have been authorized to transmit 
to the Court of Claims " any claim where the decision will affect 
a class of cases or furnish a precedent for the future action of 
any executive department." The law also provides that the 
accounting officers shall continue to receive, examine, and 
consider the justice and validity of claims under appropria- 
tions, the balances of which have been exhausted or carried to 
the surplus fund, that may be brought before Congress within 
a limited period. The amount due to each claimant is to 
be reported at the beginning of each session to the speaker of 
the House, who is required to lay the report before Congress 
for consideration. 

The last topic to be noticed is an investigation into the sys- 
tem of bookkeeping in the treasury department.^ This sprang 
from the belief that the work was improperly done, and that 
an investigation would reveal great crookedness. As warrants 
have always been required for money paid or received by the 

' Ex. Doc, No. 282, 40 Cong., second session. 

' Senate Report on Accounts of Treasury Department, No. 371, 44 Cong., 
first session. 



1876.] GOVEENMENT ACCOUNTING. 533 

treasury, it was, of course, easy to ascertain the amount of 
tliese. When a warrant for receiving money has been issued, 
signed by the comptroller and register of the treasury and 
properly entered in the books of their offices, and is receipted 
by the treasurer of the United States, the amount is charged 
in his general account, and is technically known as " covered 
money," and cannot be drawn from the treasury, except by an 
appropriation. Warrants covering money into the treasury 
are drawn as soon as possible after making deposits. 

The amount deposited in the treasury and covered by 

warrants from March 4, 1789, to June 30, 1875, 

was 514,973,305,670.59 

The amount deposited but not covered at that time was 1,072,002.73 

$14,974,377,673.32 

The amount paid on warrants w as 114,797,839,742.74 

The amount deposited with the States 28,101,644.91 

Unavailable 2,661,866.53 

Balance on hand in the several offices and depository 

banks or in transit 145,774,419.14 

$14,974,377,673.32 



An examination of the books had been in progress for 
six years prior to the investigation, which, though revealing 
extraordinary discrepancies, also showed that they were 
the consequences of imperfect bookkeeping.' "Indeed," said 
Secretary Bristow, in a letter to the investigating committee, 
"such an accountability for the moneys received and dis- 
bursed has always been so enforced by this department that 

'N. y. Com. BuUetin, June 1, 1876; N. Y. Times, January 19 and 23, 
1876. 



534 FINANCIAL HISTORY OF THE UNITED STATES. [1876. 

every cent of money received by the government since its 
organization is either on hand or properly accounted for." 

The amount that had been covered into the treasury derived 
from loans and treasury-notes from the organization of the 
government to June 30, 1875, was $8,441,763,203.84, and 
the expenditures for the same period for redeeming the loans 
and treasury-notes were $6,325,583,753.34. The outstanding 
principal, therefore, was $2,116,179,450.50. This sum, how- 
ever, exceeded the actual amount $116,105,081.45, and when 
the discrepancy was first discovered in the treasury depart- 
ment, Mr. Bayley, who was examining the books, was 
astounded. The explanation was soon found. Stocks amount- 
ing to the above sum had been issued to pay various debts 
and claims, the revolutionary debt, the Mississippi and 
Louisiana purchases, and other obligations, and on maturity 
they had been paid from the general funds in the treasury. 
This showed an expenditure for which there was no corres- 
ponding receipt, as no money had ever come into the treasury 
in these transactions. 

Two items in the above table need explanation : the amount 
deposited with the States, and the unavailable fund. The 
latter fund had its origin in losses not caused by the fault of 
the treasury, but by robbery, accident, defalcation, misconduct 
of depositaries and the like ; yet the treasurer was responsible 
for these sums, and was charged therefor. In ordinary book- 
keeping such deficits would be entered in the profit and loss 
account by crediting cash and debiting the defaulter. The 
treasurer could not do this, so an account called " unavailable" 
was created, which was charged with the amounts, and the 
treasurer was credited in his general account. This practice 
though long continued has not been authorized by law. In 



1878.] GOVERNMENT ACCOUNTING. 535 

order to relieve the treasurer, Congress adopted the safe expe- 
dient of reimbursing him in specific cases. Se\ieral ineffect- 
ual attempts have been made to pass a bill relieving him from 
liability for losses not occasioned by his own fault, and for 
extinguishing the unavailable account above mentioned.^ It 
nevertheless appears on the treasurer's books, and amounts 
nearly to thirty millions. The nature of one item of $28,101,- 
644 is well known, for it is the deposit made by the treasury 
department with the States by authority of the law of 1836.^ 

' U. S. Treasurer's Eeport, 1876. 

' For organization and duties of the accounting offices in the treasury de- 
partment, see Appendix, 1 U. S. First Comptroller's Decisions, 2 ed. ; see, 
also, Keyser's case, 4 Ibid., p. 261. 



536 FINANCIAL HISTORY OF THE UNITED STATES. [1865. 



CHAPTER X. 

APPROPEIATIONS AND EXPENDITURES. 
1865—1885. 

If progress has been slow in improving the mode of appro- 
priating public money, nearly every step has been forward. 
In 1790, all the appropriations were included in one bill, 
which was of a very general nature. With a considerate 
regard for economy and clear knowledge, the appropriations 
have been specified more and more minutely, and classified. 
When the items in a bill became very numerous, a portion of 
them was put in another bill, and thus the number has 
increased to a dozen. As soon as possible after their passage, 
the secretary of the Senate and the clerk of the House make a 
complete record of the appropriations and of the new offices 
created, which is sent to the secretary of the treasury. 

The bills are framed on information furnished by the sec- 
retary of the treasury. He requests the departments to send 
estimates to him of expenditures for the next fiscal year, those 
for the treasury department are added, and the " letter " con- 
taining all of them is ready by the opening of the session. 
The Appropriation Committee are given a month to prepare 
and report the bills, but the law is rarely observed. Of late 
the practice has been growing for the departments to send 
supplemental estimates, which delays action. The committee 
cannot do much until the wants of the departments are fully 



1865.] APPROPEIATIONS AND EXPENDITURES. 537 

known, and they are without excuse for neglecting to make 
careful and complete estimates in the beginning. 

The appropriation bills, when reported, contain the infor- 
mation on which the recommendations of the committee are 
founded. This consists of statements from different officers in 
the departments explaining for what purposes money is desired, 
and the reasons for the amount asked. The action of the 
House on the bills is variable. If considered, this is done in 
the committee of the whole, but very often the bills are not 
reported until late in the session, when no time remains for 
discussion, and consequently they are passed without debate. 
In the Senate, more time is bestowed on them. The Appro- 
priation Committee usually reduce the estimates of the depart- 
ments, but many are restored by the Senate. The bills then 
go to a committee of conference, and an agreement is effected 
by retaining the increase in some cases and reducing it in others. 
Every bill has a different history in some respects, and what 
we have written, it must be remembered, is merely the gen- 
eral course of these measures. 

The newest bill of the twelve is called the sundry civil, and 
was originated in 1862. It is of a miscellaneous composition, 
containino: items not mentioned in other bills — a kind of 
omnium gatherum, or record of human forgetfulness. The 
appropriations for public buildings, which have been very 
large for several years, are put into this bill ; if, however, an 
appropriation of this kind goes through both houses solitary 
and unharmed, the reason is that friends not far away expect 
to go along soon, either alone or in company. 

The deficiency bill is one of the oldest, and requires brief 
explanation. Although no money can be drawn from the 
treasury without an appropriation, nothing prevents a person 



538 FINANCIAL HISTORY OF THE UNITED STATES. [1875. 

from doing things for the government with the expectation of 
receiving compensation. So services of one kind and another 
are rendered every year, and money is regularly apj>ropriated 
to pay for them. One of the tricks occasionally employed by 
political parties to win the favorable regard of the people is to 
make the appropriations in eleven of the bills as small as 
possible, and cover up the deficit thus incurred in the deficiency 
bill of the following year. This is like the method of some 
coi'porations that make larger dividends than have been 
earned, borrow the money to pay them, and charge it to the 
" construction account." The plan was never patented by the 
inventor, consequently all parties have used it whenever they 
imagined this cheap cunning would yield votes. The last 
Napoleonic usurper in France covered up $350,000,000, 
expended in fifteen years, by a mysterious system of book- 
keeping ; in our country political parties are too watchful of 
each other to permit a game of that kind to be long played 
without exposure. 

In reporting the deficiency bill for 1875, the committee* 
remarked that under the Acts then in effective operation pro- 
hibiting the use of unexpended balances of appropriations 
unless specifically rendered available, and requiring that 
expenditures should only be made pursuant to appropriations 
made therefor, the requisitions for deficiency appropriations 
were decreasing from year to year. " This, aided by the rigid 
scrutiny of all estimates, and exhaustive study to reduce them, 
has caused a more careful method of making the same on the 
part of the departments, resulting in a much more exact 
and economical use of the appropriations when made." The 
deficiency appropriations did, indeed, shrink until 1877, when 
' No. 270, 43 Cong., second session. 



1878.] APPEOPraATIONS AND EXPENDITURES. 539 

they were only $834,G95, but since that time they have been 
increasing. 

The appropriations are divided into three classes, annual, 
permanent annual, and permanent specific. The first class of 
appi-opriatious are for the current ordinary expenditures of the 
government ; the chief item in the second class is for interest 
on tlie public debt ; the third class are for improving rivers 
and harbors, fortifications, buildings, and the like, and which 
remain appropriated until expended. Appropriations of each 
class may be definite or indefinite ; in other words, a definite 
fixed amount may be appropriated for anything, or an in- 
definite amount. All the jjermanent annual appropriations are 
indefinite, but Ck)ngress could make them definite by specifying 
fixed sums for all the objects for the service of each fiscal year. 
The only difference between a definite annual and a definite per- 
manent annual appropriation is, that the former is made by a 
law passed annually " for the service of" one designated fiscal 
year, and the latter by a law operating until repealed for the 
service of each subsequent year without limit or designation.* 

At the close of the Mexican war in 1847, more than one- 
half of the national expenditures belonged to the second class 
of appropriations. The number have been reduced, but the 
departments have sought to maintain them in order to simplify 
and reduce the estimates. Many abuses have their origin in 
permanent annual appropriations. One illustration may be 
given. During the war, when authorizing a great loan, Con- 
gress enacted that a fixed percentage should be used to pay the 
expense of negotiating and printing the bonds. In 1872 the 

• See Com. of Secretaiy Sherman to Speaker of the House, Dec. 14, 1877, 
and further documents on the same subject, 1 U. S. First Comptroller's De- 
cisions, chap. 14, 2 ed. 



540 FINANCIAL I-IISTOEY OP THE UNITED STATES. [1884. 

Committee of Ways and Means recommended a bill, which 
passed without debate, making a permanent appropriation of 
one per cent of all notes and bonds and fractional currency 
issued and re-issued in any year as the expense of the national 
loan. In the year 1874 paper amounting to $500,000,000 
was printed at the treasury department. Thus the authority 
existed for expending $5,000,000 without legislative action. 
From these appropriations arose the bureau of engraving and 
printing, with twelve hundred employees, whose salaries were 
regulated solely by the secretary of the treasury. The salaries 
of five hundred clerks and employees in four of the offices of 
the treasury department were regulated in like manner and 
paid from this appropriation. In 1874 this permanent annual 
appropriation was swept away, and the number and compen- 
sation of persons employed to manage the national loan, print 
the bonds, etc., were fixed in the annual legislative, executive 
and judicial appropriation bill. 

If Congress did wisely in subjecting those expenditures to 
annual scrutiny, why has not a more intelligent regard been 
shown in the expenditure for collecting duties on imports? 
Prior to 1849 the expense of collecting them was paid from 
the gross receipts, the balance going into the treasury. By the 
Act of that year the gross receipts were paid into the treasury, 
and estimates were submitted to Congress for the expense of 
collecting them. In June, 1858, a backward step \\'as taken. 
A permanent semi-annual appropriation was made, and col- 
lectors were authorized to apply certain customs fees toward 
the cost of collection. The amount of the appropriation has 
been increased from time to time, as the receipts became greater 
and more difficult to collect. In 1882 Congress required the 
secretary of the treasury to include in his annual estimate of 



1883.] APPROPRIATIONS AND EXPENDITURES. 541 

expenditures a statement of the number and compensation of 
officials, who, in liis judgment, were needed to collect the 
revenue, and also an estimate of the amount required for the 
contingent expenses of the customs service. The evident 
intention of Congress in obtaining such data ^vas to make 
specific appropriations for collecting the revenue from customs 
in each district, and to repeal the existing law providing for 
a permanent annual appropriation for that purpose. The 
secretary transmitted the information ^ within the time pre- 
scribed.^ The aggregate amount of money required for the 
salaries of collectors and other officers was $6,639,650. At 
that time the collectors were compensated, some by salaries 
only, others by salaries, commissions, and fees, and a third 
class by commissions and fees. In some cases the compensa- 
tion was too small to insure the constant service of competent 
men ; in others, the salaries and emoluments were excessive 
for the service rendered. In many districts no duties had 
been collected for years ; in others, the duties collected were not 
enough to pay the cost of collection.^ In those districts the 
duties of the officers consisted chiefly in issuing documents to 
vessels, collecting the hospital tax and fees, and in making up 
the monthly and quarterly returns to the treasury department. 
Nothing could exceed the simplicity of many of these returns, 

^ Ex. Doc, No. 73, 47 Cong., second session. 

^ Secretary Folger said, in his annual report for 1883 : " There are 
twenty-two ports of entry at which not a dollar of duties has been col- 
lected for years, at different times. There are thirty-two ports of entry in 
which the year's collections from all sources have not equalled the year's 
expenses. . . . The custom-houses in these districts are, however, kept up, 
with all the formalities of activity, with deputies, inspectors, and clerks, 
to make oflScial returns to the accounting officers of the treasury and the 
bureau of statistics." 



542 FINANCIAL HISTORY OF THE UNITED STATES. [1883. 

consisting, as they did, of the following words : " no trans- 
actions." When custom-house fees were first exacted by the 
law of March, 1799, it was thought that the customs service 
would be self-sustaining, but it has never been. In 1883 the 
amount of fees collected at all the ports was about $600,000, 
while the cost of collecting the revenue was more than 
$6,000,000. The fees are often difficult to collect, are paid 
by ship-owners and importers unwillingly, and greatly increase 
the clerical work of the service. " The advantage," said Sec- 
retary Folger, in his report in 1883, "of fixed salaries is 
obvious. An objectionable feature of the present system is 
the temptation at small ports to obtain additional compensa- 
tion for storage under the bonded-warehouse system. Then, 
too, is the uncertainty of the amount of compensation." In 
the June Act of 1874 Congress partly remedied this defect in 
the system by giving fixed salaries to the officers in the lead- 
ing ports, but stopped midway, leaving the compensation of 
others unchanged. The discretion of collectors and other 
custom-house officers, however, has been narrowed by regulat- 
ing the number and salaries of employees. 

Legislative reform has certainly moved very slowly in this 
direction. The number of permanent annual appropriations 
have been reduced, while others have been so clearly defined 
and limited that no loss is likely to arise.^ A similar degree 
of thoughtfulness has been shown by Congress in paring down 
the contingent funds of the departments to a small figure. 
Congressional action, it must be admitted, has been slow in 

' "Annual appropriations for speciiic purposes, and for a specific time, are 
the only guards for expenditure. If, then, we have extravagance, it can only 
be the extravagance of Congress, and not of executive officers." — Mr. Sher- 
man, in Senate speech, May 23, 1870. 



1879.] APPEOPKIATIONS AND EXPENDITUEES. 543 

these matters, but no one can deny that in ordinary appropria- 
tions greater intelligence and scrutiny are shown in making 
them than were formerly, and more and clearer information 
is given concerning them. From the reports of the commit- 
tees and those printed by the departments, the most minute 
information can easily be obtained pertaining to the receipts 
and expenditures of the government.^ 

How singular, therefore, that with such a wise regard for 
economy in the ordinary expenditures of government. Congress 
should too often join an utter disregard for economy in much 
larger ones ! An annual illustration of this kind is the river 
and harbor bill. By a careful distribution of appropriations 
enough votes are obtained, save on rare occasions, to pass a bill 
for appropriating a large sum, from which accrues no corres- 
ponding public benefit. The pension arrears Act of 1879 is per- 
haps the gravest of all the misappropriations of Congress. On 
the 19th of June, the year before, Mr. Haskell, of Kansas, 
moved a suspension of the rules, and that the Committee on 
Invalid Pensions be discharged from the further consideration 
of a bill to provide that all pensions on account of death or 
wounds received, or disease contracted, in the military service 
during the late war, should begin from the date of death or 
discharge from service, and that the bill be passed with the 
amendment that no claim agent, or other person, should be 
entitled to receive any compensation for services in making 
applications for arrears in pensions. No report of the proba- 
ble expenditure was made, and the bill passed immediately by 
a vote of one hundred and sixty-four to sixty-one. The pen- 
sion agents, who were to receive nothing for making appli-. 
cations, were the most zealous advocates of the bill ; for a 
^ See Appendix B. 



544 FINANCIAL HISTORY OF THE UNITED STATES. [1879. 

long period they had labored unceasingly, confident that, 
if enacted, they would reap fortunes. The amendment was 
harmless, indeed served them a good purpose, for many 
now innocently supposed the measure was enacted primarily 
for the benefit of the soldiers, instead of the pension agents. 
The House passed the bill with that self-disinterestedness 
which has marked the conduct of so many members on the 
passage of river and harbor bills and similar measures, ex- 
pecting no return save the grateful remembrance of the sol- 
dier at the ballot box, yet confidently expecting that the bill 
would forever sleep in the Senate. On the 16th of January, 
however, Senator Ingalls pushed the bill through the upper 
branch. Interrogated concerning the probable expense, he re- 
plied, "Somewhere from eighteen to twenty million dollars." 
Only four senators voted nay ; but having the same opinions 
and sentiments that ani